“Discharge” in the bankruptcy sense refers to clearing the debtor’s slate of all, or most, past debts. Although many people expect that filing for bankruptcy will wipe out all of their debts, that is not always the case. Bankruptcy only discharges certain debts. The availability of discharge depends on the type of bankruptcy proceeding involved, who the debtor is and what type of debts the debtor has.
A Discharge Does Not Wipe the Slate Completely Clean, but It Does Afford Great Relief
There are a number of prerequisites for obtaining a discharge. In a Chapter 7 liquidation case, if the debtor was in some way dishonest or uncooperative, such as by making fraudulent transfers or failing to keep adequate records prior to filing or by ignoring lawful court orders after filing, the court may deny discharge. In addition, a Chapter 7 debtor cannot have his or her debts discharged more than once every nine years. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides that in order to receive a discharge, an individual debtor must complete a personal financial management class.
When a discharge is granted, it protects the debtor from any further liability on the discharged debts. No legal action may be taken against the debtor to collect on discharged debts, and no collection calls or letters may be sent with regard to such debts. A discharge does not actually cancel or extinguish the debt, however; it merely extinguishes the debtor’s personal liability. Also, a discharge does not automatically discharge a co-debtor’s or guarantor’s liability.
A bankruptcy discharge also has no effect on liens. Take, for example, the situation in which the debtor owes the creditor $5,000 and the debt is secured by the debtor’s car, which is worth $3,000. If the debtor files for Chapter 7 relief and receives a discharge, the discharge does not extinguish the creditor’s security interest. In other words, the creditor can still repossess the car. However, it cannot go after the debtor for the $2,000 difference between the debt and the value of the security. That is the personal protection afforded to the debtor by the bankruptcy discharge.
A court may revoke a Chapter 7 discharge if the trustee or a creditor requests it, and if the debtor obtained the discharge through fraudulent means; acquired property that is property of the estate and knowingly failed to report the property or give it to the trustee; or made a material misstatement or failed to provide information in connection with an audit of his or her case. 11 USC §727(d).
Debts that Remain After a Chapter 7 Discharge
Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged:
- Debts or creditors not listed on the schedules filed at the outset of the case
- Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship
- Recent federal, state and local taxes
- Child support and spousal maintenance (alimony)
- Government-imposed restitution, fines and penalties
- Court fees
- Debts resulting from driving while intoxicated
- Debts not dischargeable in a previous bankruptcy because of the debtor’s fraud
Educational loans guaranteed by the United States government are generally not discharged by a Chapter 7 bankruptcy. They may be dischargeable; however, if the court finds that paying off the loan will impose an undue hardship on the debtor and his or her dependents. In order to qualify for a hardship discharge of a student loan, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future. The debtor must apply before the discharge of the debtor’s other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts often apply a three-part test to determine eligibility:
- Income — if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents
- Duration — the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period
- Good faith — the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy
Additional Non-Dischargeable Debts
In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:
- Debts from fraud, including certain debts for luxury goods or services incurred within 90 days before filing and certain cash advances taken within 70 days after filing
- Debts from willful and malicious acts
- Debts from embezzlement, larceny or breach of fiduciary duty
- Debts from a divorce settlement agreement or court decree, if the debtor has the ability to pay and the detriment to the recipient would be greater than the benefit to the debtor
If you have questions about which debts will be affected by a bankruptcy discharge, it is essential to seek the advice and counsel of an experienced bankruptcy attorney.