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WHAT IS A DISCHARGE & WHAT ARE THE ISSUES RELATED TO A DISCHARGE?

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The ultimate goals in filing a bankruptcy is to deal with your debts and to receive the discharge. Bankruptcy takes a lot of work and commitment if you want to do it right. If you spend the time to complete the process correctly, follow all the rules and then the discharge is yours.

– Diane L. Drain

NOTE: The law changes and the following is only a synopsis of what has been deemed dischargeable. Always consult your attorney to determine the current status of the law and its affect on your debts and assets.

The scope of the discharge is different in each bankruptcy chapter. Under the pre-2005 Bankruptcy Reform Act a Chapter 13 discharge more encompassing, to encourage individuals to use Chapter 13 to repay a portion, if not all of their debts. A Chapter 13 discharge also offered protection in the case of some fraudulent actions that would not have been discharged in a Chapter 7. That does not appear to be the case after the Reform Act. Put most simply, most unsecured debts are dischargeable. Most secured debt survives bankruptcy as a charge on the property to which it attaches unless a court order modifies the lien.

If you borrow money with the specific intent of discharging the debt in bankruptcy instead of paying it back, the debt is not dischargeable. In addition, (a) certain luxury purchases made within 90 days of the bankruptcy filing are presumed non-dischargeable; (b) cash advances aggregating over a certain dollar amount taken within 70 days of the bankruptcy filing are presumed non-dischargeable (523(a)(2)(C) ; and, (c) debts involving materially false financial statements are non-dischargeable under certain circumstances.

If taxes are involved, it is important to know the exact status of your obligations. Ask your tax authority for a document called a literal transcript. This is a very complex set of facts and the mere date of your bankruptcy may lock you into a result that you did not anticipate.

As in a chapter 7, a discharge is the court’s order stating that you do not have to pay your debts to the creditors that were listed in your bankruptcy documents, so long as the court did not entered a non-dischargeability order.  Your chapter 13 plan provided for payment of back child support, alimony/maintenance, plus certain taxes.  As in the chapter 7, the effect of a discharge is that debtors are released from personal liability for all dischargeable debts, and all creditors, whose debts are discharged, are prohibited from performing any act to collect such debts from the debtors.  This is known as a permanent, federal injunction.

As in a chapter 7, a discharge is the court’s order stating that you do not have to pay your debts to the creditors that were listed in your bankruptcy documents, so long as the court did not entered a non-dischargeability order.  Your chapter 13 plan provided for payment of back child support, alimony/maintenance, plus certain taxes.  As in the chapter 7, the effect of a discharge is that debtors are released from personal liability for all dischargeable debts, and all creditors, whose debts are discharged, are prohibited from performing any act to collect such debts from the debtors.  This is known as a permanent, federal injunction.

The Debtor is not relieved from performing the duties required under the Bankruptcy law. One example of a continuing duty is the Debtor’s obligation to surrender assets or tax refunds to the Trustee after the discharge is entered. In the event the Debtor fails to perform those duties an action may be brought to revoke the discharge. This will mean that the Debtor went through all this hassle and ends up with no protection from their creditors garnishing wages, suing or seizing bank accounts. Even after a discharge, generally a creditor that has a valid lien on property belonging to a debtor (such as: house, car, furniture, jewelry) may recover the property or its value. However, if the debtor possesses certain property that is encumbered by a judicial lien or a non-purchase—money security interest, the Debtor will have to bring this issue to the Court for an order which will remove the effect of the lien. This action is called a Motion to Avoid a Lien.

If the debtor wants to keep assets that have secured liens (such as a house or car) the debtor can either continue making the same payments as before the bankruptcy, or pay the lender one lump-sum payment equal to the fair market value of the item (redemption). See more on reaffirmation agreements below.

Debts that are not dischargeable in Chapter 7 include: certain taxes; family support; student loans; drunk driving judgments; criminal fines or restitution; or debts incurred by fraud or intentional wrongdoing, loans used to pay non dischargeable federal taxes. See 11 U.S.C. §523(a) for a complete list. For more information see Chapter 7 FAQ. Usually, everything else is dischargeable: loans, credit card debts, judgments, medical bills, old income taxes.

If you have Deed of Trust, Mortgage or Agreement for Sale on your home, or a line of credit on your car, or purchased your appliances on the store’s own credit card – these are considered secured debts. Secured creditors debts will survive a chapter 7. If you do not pay the debt, or at least the fair market value of the item secured, then you will lose it. But, even if you lose the item, you do not have further liability for the debt. In certain situations it may be possible to avoid a lien because it impairs your right to property that is exempt or because the lien exceeds the fair market value of the asset.. Back to top ↑

Debts that are not dischargeable in Chapter 13 include family support, fines, student loans, and drunk driving judgments are non-dischargeable. See 11 U.S.C. §523 and §1328 for a complete list. For more information see Chapter 13 FAQ. If you want to stop a foreclosure or trustee’s sale on your home then the Chapter 13 plan must provide for payment of all the arrears. You may also be able to keep your vehicle (depending on when you purchased it) if you pay at least the current value, at a negotiated interest rate.

Certain taxes must be paid in the Chapter 13. If your creditors would have received monies because of the sale of some of your assets then you must provide that they receive the same or more in your chapter 13 Plan. A plan of reorganization must be proposed in “good faith”. The definition of what makes up a good faith plan currently a moving target. It is important that you fully disclose this type of problem to your attorney.

Creditors and the trustee have a 60 day period after the creditor’s meeting to file a complaint indicating that they believe there is good reason why their debt should not be discharged (forgiven) or a good reason why this chapter 7 case should not be continued (Bankruptcy Code §523(a)(2), (4), (6, and (15)). This action is called non-dischargeability complaint. The Trustee can request that the court deny a chapter 7 discharge in some cases.

Chapter 7 – Debtors should not worry about denial of discharge if they fully disclose their assets and their financial history, take all the required classes, file the required forms, not have any excess income which is deemed to be disposable income and should be used for paying their creditors over time (a chapter 13) The debtor can be denied a discharge of all of debts if the court finds, after trial, that the debtor committed certain acts such as: transferring, concealing or destroying assets or financial records; making a false oath on the schedules or under oath in the case; or failing to keep books and records from which the debtor’s financial condition can be ascertained.

Discharges are not denied lightly or easily. This is intended as a penalty for debtors who deliberately try unfairly or dishonestly to thwart their creditors. The complete list is found at 11 U.S.C. 727. Denial of discharge affects the debtor’s liability to all creditors, whether or not the debtor committed some fraudulent act with respect to that particular creditor.

Denial of discharge doesn’t stop the case from proceeding forward. The trustee proceeds to gather and liquidate the assets of the estate, so the debtor loses not only the non-exempt assets but any chance of ever discharging the debts in bankruptcy. Chapter 13 – Same as above, except the Debtor is required to complete their Plan payments, keep all child support and alimony/maintenance current and comply with the requirements of the Court and the Bankruptcy Trustee.

Debts that survive by law or court order can still be collected. These debts include: priority taxes, support, student loans, and secured liens. Any debts that were reaffirmed also survive the bankruptcy.