The basics of the bankruptcy discharge

Understanding how the bankruptcy discharge works is important in determining whether it is right for you.

During 2013, 1,071,932 bankruptcies were filed in the United States. While this number is about 150,000 lower than the number of 2012 filings, it is evident that many people are struggling with the effects of unemployment, unexpected medical bills or other financial ills.

Most people do what they can to pay off their debts. In the face of substantial debt, unless their situation improves dramatically, it is often a futile effort. As a result, more than a million people last year turned to bankruptcy, seeking the discharge that will relieve them of their debt. Since the discharge is governed by different rules, depending on the type of bankruptcy filed, it is important to have a basic understanding of how the discharge works.

Discharge overview

Achieving the discharge of debt is the ultimate goal for those who file bankruptcy. Once the discharge has been granted by the court, the filer no longer has an obligation to repay the debt that is subject to the discharge. Additionally, creditors may no longer contact or attempt to collect any discharged debt. In addition, the discharge of debt is tax-free and need not be included as income on tax returns.

The Supreme Court has held that there is no constitutional or fundamental right to file bankruptcy. Rather, "a central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Grogan v. Garner, 498 U.S. 279, 286 (1991).

In Chapter 7 bankruptcy, the discharge is granted only after the period that a creditor may object to the discharge expires, which is 60 days after the meeting of the creditors. Creditors may object to the discharge on many grounds including:

  • The debtor's failure to complete a course on personal financial management
  • Attempts by the debtor to conceal, destroy or transfer assets with the purpose of defrauding or delaying creditors
  • Other acts of fraud or deceit on the debtor's part

If the creditor is successful in objecting to the discharge, a discharge of all or some of your debt may not be granted. However, if there are no objections or the objection period expires, the court grants a discharge at the conclusion of the bankruptcy.

In Chapter 13 bankruptcy, the filer is typically entitled to a discharge if he or she has completed making payments under the repayment plan. In general, creditors may not object to the discharge.

Limitations on discharge

Although the discharge applies to a wide variety of debts, it has its limitations. Some common types of debt that are not dischargeable are:

  • Certain tax obligations
  • Child support or alimony claims
  • Debts for intentional or malicious injuries to other persons or property
  • Government fines and penalties
  • Federal student loans
  • Personal injury damages caused by drunk driving

As the laws governing the discharge of debt are rather complicated, it is important to contact an experienced bankruptcy attorney to learn more about how filing bankruptcy would affect your specific situation. After advising you, an attorney can recommend the best way to achieve the fresh start that you are seeking.

Keywords: bankruptcy, discharge