What Is a Bankruptcy Discharge?
A bankruptcy discharge, also known as a discharge in bankruptcy or simply as a discharge, is a permanent court order that releases a debtor from liability for certain types of debts at the end of the bankruptcy process. After it is issued, creditors are not permitted to contact or pursue debtors for the outstanding debt.
Key Takeaways
- A bankruptcy discharge is an official court order that releases a debtor from liability for certain types of debts.
- Creditors are not permitted to contact or pursue debtors for an outstanding debt after it has been discharged.
- The timing of the discharge varies based on the type ofbankruptcythe debtor has filed.
- Debts not subject to discharge typically include child support, alimony, and debts for injuries to a person or property, among others.
How a Bankruptcy Discharge Works
A bankruptcy discharge provides relief to a debtor, as it means they are no longer legally required to pay back those debts. The subject of a bankruptcy discharge must meet certain requirements before it is granted, and the timing of the discharge varies based on the type of bankruptcy that they filed.
Chapter 7 bankruptcies, in which many of the debtor's assets will be sold off to pay their creditors, generally result in a discharge about four months after the bankruptcy petition is filed. Chapter 13 bankruptcies, in which debtors get to keep more of their assets but must agree to a plan to repay their debts over a period of three to five years, can bring a discharge at the end of that period.
An individual debtor under Chapter 7 bankruptcy is usually granted a discharge; however, the right to a discharge is not guaranteed. For instance, there may be pending litigation involving objections to the discharge.
The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and, if one exists, the trustee's attorney. The debtor and the debtor's attorney also receive copies of the discharge order.
This notice is simply a copy of the final order of discharge and is not specific to the debts the court determines should not be covered by the discharge. The notice informs creditors that the debts owed to them have been discharged and they should not attempt any further collection.
The notice also cautionscreditors that they may be subject to punishment if they continue collection efforts. Any failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order within the time required by the rules does not affect the validity of the order granting the discharge.
Which Debts Get Discharged in Bankruptcy and Which Don't?
Debts that are part of a Chapter 7 discharge include unsecured debts, collection agency accounts, medical bills, utility bills, dishonored checks, certain tax penalties, attorney fees, judgments from lawsuits, and any lease contracts the person may have.
Credit card debt is one of the most common types of debt to be discharged in bankruptcy. A discharge in bankruptcy order does not, however, discharge all debts. In fact, the federal courts (which handle bankruptcy cases) list 19 different types of debt that are not eligible for discharge. The most common ones are child support, alimony payments, and debts for willful and malicious injuries to a person or property.
For certain kinds of bankruptcies, condo fees, debts owed to some tax-advantaged retirement plans, debts from DUIs, and most student loans are also not discharged. And any debt not listed in the bankruptcy petition cannot be discharged. In addition, valid liens on specific property to secure payment of debts that have not been dischargedwill remain in effect after the discharge, and a secured creditor has the right to enforce the liens to recover such property.
Student loans have historically been nondischargeable in bankruptcy. However, in close coordination with the Department of Education, the Department of Justice released a 2022 memorandum outlining a fairer, more accessible process for debtors to have their student loans discharged. To do so, a debtor must file a suit within their bankruptcy suit called an adversary proceeding.
The new guidelines only apply to federal student loans; private student loans are dischargeable under normal bankruptcy proceedings.
Can Bankruptcy Discharge Be Denied?
In certain circ*mstances, courts can deny a discharge for all of a person's debts or for particular debts.
The court can deny a discharge in Chapter 7 for a number of reasons, including the debtor's failure to provide tax documents that have been requested, destruction or concealment of books or records, violation of a court order, a previous discharge in an earlier case that began within eight years before the date the second petition was filed, or failure to complete a course on personal financial management. In addition, a creditor, trustee in the case, or U.S. trustee may file an objection to the debtor's discharge.
In a Chapter 13 bankruptcy, a discharge may also be denied if the debtor doesn't complete a course on personal financial management or if they've gotten a prior discharge in another Chapter 13 case within two years before the filing of the second case, with a few exceptions. A court may even revoke a discharge under certain circ*mstances, such as allegations that the debtor obtained the discharge fraudulently or failed to provide documents or information requested in an audit of the case.
How Does Bankruptcy Affect Your Credit Score?
Bankruptcy can remain on your credit report for up to 10 years in the case of Chapter 7 and seven years in the case of Chapter 13. That can do serious harm to your credit score, although the damage may lessen over time. Having a bankruptcy on your credit report can make it difficult to borrow money in the future. Employers and landlords may also review your credit report and take it into consideration when deciding whether to hire or rent to you.
What Happens if Creditors Try to Collect Debts That Have Been Discharged?
Creditors that are listed on the discharge are not permitted to contact the debtor or pursue collection activity, and the debtor can file a complaint with the court if a creditor violates the discharge order. The court may sanction the creditor with civil contempt, which also may be accompanied by a fine.
How Can You Rebuild Your Credit After Bankruptcy?
Rebuilding your credit after bankruptcy can be a long process, but the best way to go about it is to consistently pay your credit bills on time in the future. If you no longer have credit accounts, applying for a secured credit card can be one way to get started.
What Is the Difference Between a Discharge and a Dismissal in Bankruptcy?
In a discharge, the bankruptcy court releases the individual from certain debt obligations. In a dismissal, the court ends the proceeding without issuing a discharge.
The Bottom Line
A bankruptcy discharge can provide an individual relief from some but not all of their debts. It can also shield the person from collection attempts by their creditors. However, bankruptcy has serious implications and should generally be avoided unless there are no other alternatives.