What is the Bankruptcy Discharge and how will the discharge affect me?
The primary objective when most people file bankruptcy is to be relieved of their overwhelming debt burden. This is accomplished by Federal court order. After the bankruptcy case is filed and the automatic stay goes into effect, the bankruptcy will follow its natural course through the bankruptcy court system. For Chapter 7 cases, this a case will typically go to discharge three to four months after filing whereas a Chapter 13 repayment plan usually lasts for three to five years after which a discharge will be granted. As in most of the cases I file, if all goes well you will receive a discharge in bankruptcy. The discharge “cancels” or “wipes out” most of the debt that you had at the time the bankruptcy was filed. A bankruptcy discharge also does the following:
- It voids (cancels) any judgment determining personal liability on a debt that a State court creditor might have obtained against you; and
- It prohibits creditors from taking any action to collect a debt as a personal liability of yours.
Occasionally, I have a client who mistakenly believes that the bankruptcy discharge is wiping out their mortgage or the remaining balance that they own on their car, even if they wish to keep these items. There is some confusion here. Liens such as mortgages and vehicle financing liens will survive the bankruptcy and you must continue to pay your mortgages and car notes if you wish to keep the home or car. On the other hand, if your intent is to “walk away” or surrender the home or vehicle and give the collateral back to the lender, a bankruptcy discharge will relieve you of your personal liability associated with that debt and the lender cannot pursue you for collection of any remaining difference or deficiency after the auction of the collateral.
It is important to keep in mind that, if a debt is secured by a lien on any property belonging to you, (e.g., a home mortgage or lien on the title to a vehicle), the discharge does not prevent the creditor from repossessing or foreclosing upon that property. Generally speaking, you must pay a secured debt according to its terms to avoid repossession or foreclosure.
It is also important to address another common scenario: co-signers. While a discharge relieves you of personal liability or responsibility for your debt, it does not relieve anyone else who may be responsible with you on that debt, i.e., a cosigner or co-maker. Therefore, if your parent or grandparent, friend, or relative cosigned on the loan papers, guess who that creditor will go after? Right, your cosigner may be sued by the creditor, and that creditor does not even have to wait until the case is over. This can be an embarrassing situation for both parties. In a Chapter 13 case, your cosigner is generally protected from creditor action, making this chapter sometimes more attractive.
Power of the Bankruptcy Discharge Order
As you can see in this sample, the bankruptcy discharge order is a very simple, yet very powerful document. It only contains one sentence:
“It appearing that the debtor is entitled to a discharge, IT IS ORDERED: The debtor is granted a discharge under section 727 of title 11, United States Code, (the Bankruptcy Code).”
Straightforward language backed by a federal bankruptcy judge’s signature makes it a very powerful document capable of ordering millions of dollars of debt wiped out. The back of the discharge order, also attached, contains explanations of the bankruptcy discharge and is mailed to all of your creditors as well.
How is the discharge order granted?
In a Chapter 7 case, your bankruptcy discharge order will generally be issued by the court and signed by your judge provided that you have completed the debtor education requirement and you have paid your court fees. In a very small percentage of cases, a creditor who believes you should not be granted a discharge might hold it up a bit, but these matters are usually resolved. For a Chapter 13 bankruptcy discharge to be granted, you must have made all your required plan payments and otherwise completed other requirements of your plan. You must also complete the debtor educational course and complete a certification that you either do not owe or are current with any domestic support obligations (child support or alimony) you might be responsible for. You will not be required to appear personally in bankruptcy court to get your discharge order.
If the court receives no objections to your discharge, which is usually the case, you can expect to receive the discharge order in the mail approximately three months after your creditor’s meeting or .341 meeting (the hearing in front of the Trustee which occurs about one month after your case is filed). When you receive the discharge order, you should put it in a safe place with your other valuable and important papers because you may have to show it to creditors later. Please don’t call the Court clerk or the Trustee trying to speed up the discharge process. Feel free to call my office if you believe that you should have received the discharge. I will check with the bankruptcy court to see if there is a delay. Usually, if there is a delay, it is simply an oversight by your case administrator and they will quickly issue the discharge whereupon my office will email you a copy. In most cases, the bankruptcy court clerk will mail out the discharge order within two to three months after you go to your court hearing or meeting of creditors.
Are all my debts discharged by order of the bankruptcy court?
Yes, in most of my client’s cases, all debts are discharged. This includes medical bills, credit card debt, car purchases or lease deficiency balances (in cases where a car has been repossessed or surrendered and a balance remains), past-due utility balances, etc. SBA or Small Business Administration Loans are also dischargeable in bankruptcy. There are some well-known exceptions to the bankruptcy discharge order, meaning these types of debts will survive or pass through the bankruptcy. Child support and alimony are not discharged in bankruptcy. Recent income taxes owed to Federal or State governments are generally not dischargeable unless they are more than three years old and the tax returns were filed timely. Presently student loan debt, both public and private are non-dischargeable but hopefully the United States Congress will be changing this in the foreseeable future as the mounting student loan debt presently exceeds one-trillion dollars. It is also important to note that only debts owed from the period before the bankruptcy was filed will be discharged which means that the bankruptcy discharge will not apply to debts that you became obligated to pay during the case or after the date the bankruptcy case was filed.
Are there some debts that are never discharged in Bankruptcy?
Yes, most people know that child support and alimony are non-dischargeable in bankruptcy. The Bankruptcy Code specifies some other debts that are not discharged in your Bankruptcy. The list includes:
- Most income taxes (special rules apply)
- Student loans, unless you file a complaint in bankruptcy court claiming and “undue hardship,” i.e. very unusual and compelling circumstances (i.e. so disabled you will never work again for example).
- Governmental fines and costs (parking tickets, traffic tickets, Court restitution). Driver responsibility fees are presently dischargeable.
- Debts arising from a judgment against you as a result of your operation of a motor vehicle while you were intoxicated causing death or personal injury to another.
- Consumer debts owed to a single creditor in an amount in excess of $1,000 for luxury goods or services within 60 days of the date you file, or for cash advances on your credit line aggregating more than $1,000 within 60 days of your filing date.
- If a creditor files a complaint and proves that your debt to them arises from fraud, breach of fiduciary duty, larceny, embezzlement, defalcation or a material lie on an application for credit, a drunk driving accident restitution for damage you caused, or for willful injuries you caused to another.
- Alimony, maintenance and support to a spouse, former spouse or a child or debts that, pursuant to a divorce decree, can be construed as support.
What about property with liens on it? Is that debt also discharged?
Yes, but the lien remains; and it is still subject to repossession or foreclosure once the case is finished (see above). However, the following may be of interest to you:
- Certain liens (judgments, levies, non-purchase-money interests in household goods) can be eliminated entirely by asking the court to do so. There is an additional fee for this service. If you are interested in this service, let me know and I will quote such a fee.
- Other liens, like mortgages, motor vehicle encumbrances, and purchase money security in other goods cannot be eliminated. If you want to keep the mortgaged house, encumbered vehicle, or secured item, you may have to enter into an agreement to pay a part of the debt (reaffirmation) or the value of secured consumer debts (redemption). Usually you are better off just continuing to pay for the secured item rather than signing a reaffirmation agreement.
- If you think any of these agreements or motions should be filed in your case, or if you want additional information, contact me. A creditor cannot be forced to reaffirm an obligation, but they may be forced to redeem property (where you pay the fair-market value of the security in one lump sum). Redemptions are rare because most people don’t have the cash on hand or access to the money to satisfy the redemption amount. Remember, if you want to reaffirm a debt, avoid a lien, or redeem property, you must do so before the discharge order is signed. I won’t always sign a reaffirmation agreement unless I (personally) feel it is in your best interest after consulting with you and weighing all options pro and con.
Note: You are permitted to pay anybody you want after your discharge, however, few debtors do. Remember, the bankruptcy discharge prevents creditors from attempting to collect a debt from you or taking any action that can be considered an attempt to collect a debt. It does not prohibit you from voluntarily paying a creditor after discharge. It is important that you know the significance of your discharge order. If a debt is discharged, that creditor cannot force you to pay that particular debt. This means that the creditors cannot legally file an action against you, continue an action they had filed before the bankruptcy, send you collection letters or harass you in any other way.
Can I just list and discharge the debts I want and keep the “good debts”?
No. All debts must be listed. Even debts to people you like such as friends or family members that have loaned you money that you have agreed to pay back. After your bankruptcy case is discharged, you can go ahead and pay back these family members, but it is important to list them in the first place so that the bankruptcy trustee and judge have a complete picture of your entire financial picture.
If I file does it mean my old bad debts are erased from my credit report?
No, not exactly. Similar to if you won the lottery and paid off all of the debt listed on your credit report, the consumer credit history about the account will still be there, however it will have a notation that it was “included in bankruptcy” or “discharged in bankruptcy Chapter 7”. If you pay off the debt, it would have the entire debt history but would say “paid in full” or “settled for less than amount owed” or something to that effect. Your credit report is a moving timeline of the last seven years of your credit history. What is reported is that you had a debt and that a bankruptcy was filed. Bankruptcy does not give you a good credit record or “repair” your credit record automatically. You repair your credit by paying your debts on time after the bankruptcy. Many credit card companies will send you pre-approved credit card applications and car financing offers shortly after getting your discharge. Beware of these offers, use the credit carefully and you will soon be re-establishing your credit. For guidance on re-establishing your credit after bankruptcy see my blog article here.
As you can see, the Bankruptcy Discharge, a Federal court order signed by a United States Bankruptcy Judge, is a powerful court order as it relieves you of your personal liability for most debts you owe and bars your creditors forever from attempting to collect the debt. I have successfully obtained discharges for well over 15,000 bankruptcy clients in metro Detroit and am certain that I can help you obtain debt relief as well. Contact the Law Offices of Walter Metzen online or call us today at 313-962-4656.