The Discharge in Bankruptcy
[Important Note: The following is general information
about the bankruptcy discharge, and does not constitute legal advice with regard to any particular person or situation.
If you need legal advice, you should contact an attorney immediately for legal advice specific to your situation.]
The bankruptcy discharge varies depending on the type
of case a debtor files: chapter 7, 11, 12, or 13.
WHAT IS A DISCHARGE IN BANKRUPTCY?
A bankruptcy discharge releases the debtor from personal
liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts
that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection
action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and
personal contacts. Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific
property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain
after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.
WHEN DOES THE DISCHARGE OCCUR?
The timing of the discharge varies, depending on the
chapter under which the case is filed. In a chapter 7 (liquidation) case, for example, the court usually grants the discharge
promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion
to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting). Typically, this occurs
about four months after the date the debtor files the petition with the clerk of the bankruptcy court. In individual chapter
11 cases, and in cases under chapter 12 (adjustment of debts of a family farmer or fisherman) and 13 (adjustment of debts
of an individual with regular income), the court generally grants the discharge as soon as practicable after the debtor completes
all payments under the plan. Since a chapter 12 or chapter 13 plan may provide for payments to be made over three to five
years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor’s
discharge in a chapter 7 or 13 case if the debtor fails to complete “an instructional course concerning financial management.”
The Bankruptcy Code provides limited exceptions to the “financial management” requirement if the U.S. trustee
or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or
incapacitated or on active military duty in a combat zone.
HOW DOES THE DEBTOR GET A DISCHARGE?
Unless there is litigation involving objections to
the discharge, the debtor will usually automatically receive a 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 the trustee’s attorney, if any. The debtor and the debtor’s attorney also receive copies
of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts
determined by the court to be non-dischargeable, i.e., not covered by the discharge. The notice informs creditors generally
that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned
in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on
the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by
the rules does not affect the validity of the order granting the discharge. ARE ALL OF THE DEBTOR’S DEBTS DISCHARGED
OR ONLY SOME?
Not all debts are discharged. The debts discharged
vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts
from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy.
Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature
of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor’s drunken
driving). There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions
applies to cases under chapter 13.
Generally speaking, the exceptions to discharge apply
automatically if the language prescribed by section 523(a) applies. The most common types of nondischargeable debts are certain
types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts
for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental
units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts
for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax advantaged retirement plans, and debts for certain condominium
or cooperative housing fees.
The types of debts described in sections 523(a)(2),
(4) and(6) (obligations affected by fraud or maliciousness) are not automatically excepted from discharge. Creditors
must ask the court to determine that these debts are excepted from discharge. In the absence of an affirmative request by
the creditor and the granting of the request by the court, the types of debts set out in sections 523(a)(2), (4) and (6) will
be discharged. A slightly broader discharge of debts is available to a debtor in a chapter 13 case than in a chapter 7 case.
Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts
incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.
Although a chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved
(i.e., “confirmed”) repayment plan, there are some limited circumstances under which the debtor may request the
court to grant a “hardship discharge” even though the debtor has failed to complete plan payments. Such a discharge
is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor’s control.
The scope of a chapter 13 “hardship discharge” is similar to that in a chapter 7 case with regard to the types
of debts that are excepted from the discharge. A hardship discharge also is available in chapter 12 if the failure to complete
plan payments is due to “circumstances for which the debtor should not justly be held accountable.”
DOES THE DEBTOR HAVE THE RIGHT TO A DISCHARGE OR CAN CREDITORS OBJECT TO THE
DISCHARGE?
In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge
may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the
case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object
to the debtor’s discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the
notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an “adversary proceeding.” The
court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including
failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment
of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and
other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an
earlier case commenced within certain time frames (discussed below) before the date the petition was filed. If the issue of
the debtor’s right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential
to the objection.
In chapter 12 and chapter 13 cases, the debtor is usually entitled to a discharge upon completion of all payments under
the plan. As in chapter 7, however, discharge may not occur in chapter 13 if the debtor fails to complete a required course
on personal financial management. A debtor is also ineligible for a discharge in chapter 13 if he or she received a prior
discharge in another case commenced within time frames discussed the next paragraph. Unlike chapter 7, creditors do not have
standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment
plan, but cannot object to the discharge if the debtor has completed making plan payments.
CAN A DEBTOR RECEIVE A SECOND DISCHARGE IN A LATER CHAPTER 7 CASE?
The court will deny a discharge in a later chapter 7 case if the debtor received a discharge under chapter 7 or chapter
11 in a case filed within eight years before the second petition is filed. The court will also deny a chapter 7 discharge
if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of
the filing of the second case unless (1) the debtor paid all “allowed unsecured” claims in the earlier case in
full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured
claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort.
A debtor is ineligible for discharge under chapter 13 if he or she received a prior discharge in a chapter 7, 11, or 12 case
filed four years before the current case or in a chapter 13 case filed two years before the current case.
CAN THE DISCHARGE BE REVOKED?
The court may revoke a discharge under certain circumstances. For example, a trustee, creditor, or the U.S. trustee may
request that the court revoke the debtor’s discharge in a chapter 7 case based on allegations that the debtor: obtained
the discharge raudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property
that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section
727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide
documents or information equested in an audit of the case. Typically, a request to revoke the debtor’s discharge
must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will
decide whether such allegations are true and, if so, whether to revoke the discharge. In a chapter 11, 12 and 13 cases, if
confirmation of a plan or the discharge is obtained through fraud, the court can revoke the order of confirmation or discharge.
MAY THE DEBTOR PAY A DISCHARGED DEBT AFTER THE
BANKRUPTCY CASE HAS BEEN CONCLUDED?
A debtor who has received a discharge may voluntarily repay any discharged debt. A debtor may repay a discharged debt
even though it can no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it is owed to a family
member or because it represents an obligation to an individual for whom the debtor’s reputation is important, such as
a family doctor.
WHAT CAN THE DEBTOR DO IF A CREDITOR ATTEMPTS TO COLLECT
A DISCHARGED DEBT AFTER THE CASE IS CONCLUDED?
If a creditor attempts collection efforts on a discharged debt, the debtor can file a motion with the court, reporting
the action and asking that the case be reopened to address the matter. The bankruptcy court will often do so to ensure that
the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking
any action, including the filing of a lawsuit, designed to collect a discharged debt. A creditor can be sanctioned by the
court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt,
which is often punishable by a fine.
CAN AN EMPLOYER TERMINATE A DEBTOR’S EMPLOYMENT SOLELY
BECAUSE THE PERSON WAS A DEBTOR OR FAILED TO
PAY A
DISCHARGED DEBT?
The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private
employers. A governmental unit or private employer may not discriminate against a person solely because the person was
a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits
the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying,
revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate
with respect to employment if the discrimination is based solely upon the bankruptcy filing.
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