The Bankruptcy Discharge (Part I): What is It and What Debts Are Covered?

Most people file bankruptcy in order to obtain a discharge of their liability on most debts.  (Note that the discharge provisions only apply to individuals).   A discharge means that the legal liability on a debt has been extinguished and no legal action can, thereafter, be taken by the creditor to attempt to collect such obligation.  Should further collection action ensue, you should contact the bankruptcy attorneys at Damon, Ver Merris, Boyko & Witte, PLC, for review of your legal rights and possible assertion of a claim for damages.

While the discharge provisions are quite broad and cover most types of debts, some debts, by their very nature, are not dischargeable, and will survive the bankruptcy filing.  These non-dischargeable debts include debts that are in the nature of domestic support obligations; most student loans; most tax obligations;  most fines, penalties, forfeitures or criminal restitution obligations; obligations incurred arising out of driving a motor vehicle while intoxicated that resulted in death or personal injuries; those obligations arising out of loans owed to person, profit sharing, stock bonus, or retirement plans; and usually debts the debtors (those persons who file bankruptcy) fail to list or schedule.

The discharge in a Chapter 7, or straight bankruptcy, would also not cover property settlement obligations under a Judgment of Divorce.  However, these obligations may be dischargeable in a Chapter 13, wage earner plan, if the plan is completed.  Therefore, if this is a prime reason for a bankruptcy filing, you should carefully consult with bankruptcy counsel at Damon, Ver Merris, Boyko & Witte, PLC, to review your filing options.    

Furthermore, if you have secured debts and want to keep the property which stands as collateral for that debt, you will have to sign a reaffirmation agreement in a Chapter 7 case that allows you to keep the property (with the creditor’s consent) as long as you continue to make the monthly payments, keep it insured, pay any taxes that are due, etc.   This type of reaffirmed debt, if not timely rescinded, will survive the closing of the Chapter 7 case, and if you do not make all of the required payments, the creditor could, thereafter, repossess and sell the property and establish a deficiency claim against you for the balance due, despite such bankruptcy filing.

In a Chapter 13 case, you can voluntarily agree to continue to make payments on an auto loan, home mortgage and other types of secured property, so as to be able to keep that particular property.  This would typically include a car that you need to get  to/from work, your residence, and other types of critical secured property that you are buying over time. If this type of long term debt is not paid off during the course of the Chapter 13 proceedings then it too will survive the bankruptcy filing once the plan is completed and the case is closed.

As the primary purpose of most bankruptcy filings is to rid yourself of the legal liability for most of your debts, you should carefully consider whether you actually need that type of (secured) property and consult with the bankruptcy professionals at Damon, Ver Merris, Boyko & Witte, PLC, as to other alternatives. While a bankruptcy discharge does not preclude you from voluntarily paying back, in whole or in part, any debt for which you feel a moral, ethical, or other obligation, you want to make sure such choice is voluntary, not because of a continuing legal obligation resulting from having entered into an ill-advised reaffirmation agreement.

Finally, it is critical to keep in mind that a discharge will not be issued if a debtor has previously filed a Chapter 7 bankruptcy and obtained a discharge and then subsequently files another Chapter 7 case within 8 years of the prior filing date.   If a Chapter 7 filing is followed by a Chapter 13 proceeding, the waiting period is 4 years. If a Chapter 13 case or Chapter 12 (for family farmers) were filed and a discharge was issued after completion of the plan, and then a Chapter 7 filing were made, the debtor(s) would have to wait at least 6 years from the filing of the prior Chapter 12 or 13 case in order to obtain a discharge in the subsequent Chapter 7 proceedings (unless it as a 100% plan or paid at least 70% with the debtor’s best efforts).  For repeat filers, the above is key, as you do not want to “jump the gun” and make a bankruptcy filing and find out, down the line, that all the debts you have scheduled are still going to survive your bankruptcy filing because you filed too soon.

To review your right to a discharge and the legal ramifications thereof, please contact the bankruptcy attorneys at Damon, Ver Merris, Boyko & Witte, PLC.  We are here to help and to guide you through this process.  We are here to help.