Individuals and businesses petition for bankruptcy when they are unable to pay their debts and creditors threaten or take legal action to recover payment. In most cases, the debtor hopes to have his, her, or its debts discharged through bankruptcy.
Debt discharge means that the debtor is no longer legally obligated to pay back the debts. Creditors who have their claims discharged cannot legally collect their claims.
Which Debts Are Discharged?
With some exceptions, most unsecured debt is discharged. The most common debts which are discharged are:
- Credit card bills
- Utility bills
- Medical bills
- Attorney’s fees
- Personal and business loans
- Deficiency balances
- Civil court judgments
- Taxes past a certain number of years
- Past rent and other lease obligations
Generally, a debt is discharged during bankruptcy as long as the debt is not secured by property and the Bankruptcy Code does not explicitly make the debt non-dischargeable.
What Is the Difference between Secured and Unsecured Debt?
Secured debts are debts where the creditor claims a debtor’s property if the debtor fails to pay back the creditor. The property that the creditor claims and that the debtor must surrender if the debtor doesn’t pay the debt is known as collateral property. Secured debt includes debt secured by collateral, constructive trusts, and equitable liens.
Home mortgages are the most famous example of a secured debt. The homeowner, the debtor, promises to pay the bank, the creditor, the mortgage. If the homeowner fails to do so, the bank has the right to take back the house.
In contrast, unsecured debts are merely promises made by the debtor to pay back the creditor. The distinction is important because unsecured debt is subject to discharge while unsecured debt is not.
Which Unsecured Debts Cannot Be Discharged?
The Bankruptcy Code makes certain unsecured debt non-dischargeable. These debts include child support, certain taxes, and student loans (with some exceptions), among others.
In addition, the Bankruptcy Code denies debtors discharge if the debtor commits bankruptcy fraud. The debtor is also denied a discharge if the debtor filed for bankruptcy multiple times in eight years during a Chapter 7 bankruptcy or filed for bankruptcy multiple times in six years during a Chapter 12 or 13 bankruptcy.
When Is a Discharge Given?
Discharge is given at the end of the bankruptcy. In Chapter 7, discharge is given at the end of liquidation.
In Chapter 11, discharge is typically not given. The debtors who typically file for bankruptcy under Chapter 11 are corporations, who are not permitted to receive a discharge. However, Chapter 11 allows debtors to restructure their debts in a way that they might not have to repay their debts. The General Motors bankruptcy is the most famous example of this.
In Chapter 12 or Chapter 13, discharge is given upon completion at the end of the repayment plan. However, discharge can be granted even if the debtor fails to complete the plan. This only occurs if circumstances beyond the debtor’s control cause the debtor to fail to complete the plan and modification of said plan is impracticable.
Do I Need a Lawyer?
Filing for bankruptcy is a very complicated process. If you proceed through bankruptcy incorrectly, you might not receive the discharge you need. A bankruptcy lawyer knows the particulars of filing for bankruptcy, can recommend what chapter of bankruptcy is right for you, and can ensure that your paperwork is filed correctly so that all eligible debts are discharged.