Bankruptcy Discharge

  • Discharge In Bankruptcy

Bankruptcy Basis – How To Get Discharge in Bankruptcy?

Bankruptcy discharge varies on the type of bankruptcy chapter the case is filed under by the debtor. Bankruptcy discharge relinquishes a debtor from any personal liability for some specified types of debts i.e. a debtor is no longer legally bound to pay any debts that are discharged by the court. Since the discharge is permanent, creditors are prohibited from taking any action (legal action or communication with the debtor, letter, phone call, personal contact, etc.) for the collection of discharged debts. Though the debtor is not to be held personally liable for any discharged debts, a valid lien (charge upon specific property to ensure payment of debt) that hasn’t been evaded will remain after the bankruptcy case. Thus, a secured creditor can enforce the lien to recover the property secured by the lien.

When Does Discharge Occur in Bankruptcy?

Bankruptcy discharge timings vary, depending on which chapter an entity is filing bankruptcy under. In a liquidation case (chapter 7), the court generally grants discharge immediately on expiry of the time fixed for filing a complaint objecting to discharge as well as the time fixed for filing a motion for dismissing the case for substantial abuse (60 days after the 1st date set for the 341 meeting). Generally, this takes place around 4 months after the debtor files a petition with the clerk of the bankruptcy court.

In individual chapter 11 cases, cases under chapter 12 and 13, the court usually grants discharge as soon as possible, once the debtor has completed all payments as per the approved repayment plan. Since chapter 12 or chapter 13 repayment plans take place over a 3-5 years frame, the discharge occurs around 4 years after the date of filing.

The court may also deny an individual debtor’s discharge in chapter 7 or 13 cases, if the debtor does not complete “an instructional course concerning financial management.” Bankruptcy Code provides few exceptions to “financial management” requirement if the U.S. trustee or bankruptcy administrator states that there are:

  • Insufficient educational programs available for the same
  • The debtor is incapacitated or injured or on active military duty in a combat zone

Procedure for Getting a Discharge

Unless a lawsuit for objection to the discharge is under process, the debtor mostly receives a discharge automatically. According to Federal Rules of Bankruptcy Procedure, the clerk of the bankruptcy court is required to mail a copy of discharge to all creditors, U.S. trustee, and bankruptcy trustee of the case (trustee’s lawyer, if any), debtor and debtor’s attorney. The notice (copy of the final discharge order) does not specify the debts determined by the court to be non-dischargeable (not covered under discharge) but just informs creditors that the debts owed to them have been discharged and that they refrain from any further collection. Simultaneously, creditors are also cautioned that persisting with collection efforts would be regarded as contempt of court and they would be eligible for punishment for the same. Any unintentional failure of the clerk to send the copy of discharge order promptly (within the time mentioned according to rules) would have no effect on the validity of the grant of the discharge order.

Are All Debts of a Debtor Discharged?

It is incorrect to assume that all your debts will be discharged. Which debts are discharged depends under which chapter of Bankruptcy Code the debtor has filed for bankruptcy. Section 523(a) of the Code precisely exempts various categories of debts from the discharge granted to individual debtors. The debtor still needs to repay those debts after bankruptcy. As per Congress, these debts are not dischargeable for public policy reasons (depending on the nature of the debt or the fact that the debts were accumulated due to incorrect actions of the debtor like drunken driving etc. 19 categories of debts are excepted from discharge under chapters 7, 11 and 12; under chapter 13 cases, the list of exceptions is broader.

If the language prescribed by section 523(a) applies, the exceptions are automatically applied. Most common types of non-dischargeable debts include:

  • Some types of tax claims
  • Debts not mentioned by the debtor on the lists and schedules which he/she filed with the court
  • Debts for spousal or child support or any alimony
  • Debts accumulated due to willful and malicious injuries to any person or property.
  • Debts to governmental divisions for fines or penalties incurred
  • Debts for the majority of government funded or guaranteed educational loans or benefit overpayments
  • Debts for personal injury caused due to negligent driving of a motor vehicle under the inebriated condition
  • Debts owed to some tax-advantaged retirement plans
  • Debts for some condos or cooperative housing fees

Debts described in sections 523(a) (2), (4), and (6) including obligations affected by fraud or malice are also not automatically exempted from discharge. Creditors must ask the court to get them exempted from discharge. If the creditors don’t make a request for the same and the request is not granted by the court, the debts mentioned in sections 523 (a) (2), (4) an (6) will be discharged.

Chapter 13 allows you a larger list of dischargeable debts compared to chapter 7 cases. Those debts discharged in chapter 13 bankruptcy but not in chapter 7 include:

  • debts for willful injury to property
  • debts acquired to pay non-dischargeable tax responsibilities
  • debts arising due to property settlements in separation or divorce proceedings

Though the discharge is received only when a debtor completes all the court authorized repayment (within 3-5 years’ time), there are certain circumstances under which the debtor can ask the court to grant a “hardship discharge” despite the debtor failing to complete plan payments. However, this kind of discharge is available only if the failure to repay plan payments is due to circumstances beyond the debtor’s control.

The scope of Chapter 13’s “hardship discharge” according to Sacramento based law firm Recovery Law Group is somewhat similar to that of Chapter 7 case where certain types of debts are exempted from discharge. A hardship discharge is also available in chapter 12 if the debtor is unable to complete previously agreed upon plan payments due to “circumstances for which the debtor should not justly be held accountable”.

Can Creditors Object to the Right to Discharge of a Debtor?

The debtor doesn’t possess the absolute right to discharge in a chapter 7 case. An objection can be filed by the creditors, U.S. trustee or trustee in the case. When a bankruptcy case is filed by a debtor, the creditors are informed via a notice regarding all information including the deadline for objection to the discharge. For any objection to the same, the creditor must file a complaint in the bankruptcy court within the stipulated timeframe. With the formal filing of a complaint, a lawsuit, termed as “adversary proceeding” is initiated.

A chapter 7 discharge can be denied for any of the reasons mentioned in section 727(a) of Bankruptcy Code. These include:

  • failure to provide requested tax documents
  • failure to complete course on personal financial management
  • transferring or concealment of property with intent to delay, defraud or hinder creditors
  • destroying or concealing of books or account records
  • perjury and other dishonest actions
  • inability to account for the loss of assets
  • Violation of a court order or an earlier discharge in a previous case initiated within a specific time frame before the date the petition was filed.

When the adversary proceedings start, the party objecting to discharge has to prove all facts essential to the objection of the debtor’s discharge.

In chapter 12 & 13 cases, the debtor is entitled to discharge after completion of the court-mandated payments under the repayment plan. However, similar to the case in chapter 13, discharge may not occur in chapter 13 too, if a debtor fails to complete a mandatory course on personal financial management. Other conditions which make a debtor ineligible for discharge under chapter 13 is when he/she has previously received a discharge in another case that began within specified timeframes. Unlike chapter 7, creditors cannot object to the discharge of chapter 12 or chapter 13 debtors. Creditors can object to confirmation of repayment plan but not to the discharge if the debtor has completed making plan payments.

Is a Debtor Eligible for the Second Discharge in a Later Chapter 7 Case?

A discharge in a later chapter 7 case is denied by the court if the debtor has received a discharge under chapter 7 or chapter 11 case filed within 8 years before the 2nd petition is filed. Another reason the court can deny a chapter 7 discharge is if the debtor has previously received a discharge in chapter 12 or chapter 13 case filed within 6 years before the date of filing of the 2nd case unless:

  • The debtor has paid all “allowed unsecured” claims in the previous case in full, or
  • Debtor made payments under the plan in the previous case up adding to at least 70% of allowed unsecured claims and debtor’s plan was proposed in good faith with payments represented debtor’s best effort.

The debtor is also ineligible for discharge under chapter 13 if he/she has received a prior discharge in chapter 7, 11 or 12 case filed 4 years before the current case or in a chapter 13 case filed 2 years before the current case.

Can an Approved Discharge be revoked?

Under certain conditions, the court may revoke the discharge; like when a trustee, creditor or U.S. trustee requests the court to revoke the debtor’s discharge under chapter 7 based on allegations that the debtor has –

  • Obtained discharge fraudulently
  • Failed to disclose that he/she acquired or became entitled to acquire property that would become part of the bankruptcy estate
  • Committed one of several acts of impropriety described under section 727(a)(6) of Bankruptcy Code
  • Failed to explain misstatements discovered in an audit of case
  • Fails to provide documents or information requested during the audit of case

A request to revoke debtor’s discharge must be filed within 1 year of discharge or before the date the case is closed (in some cases). The court will decide if any allegations are true, and if so, it can decide whether to revoke discharge or not.

In chapter 11, 12 and 13 cases, if confirmation of plan or discharge is obtained through fraud, the order of confirmation or discharge can be revoked by the court.

Can Debtor Pay a Discharged Debt After Conclusion of Bankruptcy Case?

A debtor who has received a discharge from the court, may voluntarily repay discharged debts, though he/she is legally not bound to do so. Sometimes a debtor agrees to repay debt as it is owed to a family member or as it represents an obligation to a person for whom debtor’s reputation is important like family doctor etc.

Recourses Available to the Debtor if a Creditor Attempts Collection of a Discharged Debt after Conclusion of the Case

Once the bankruptcy case concludes, a creditor is not allowed to attempt any collection for discharged debts. Yet, if any creditor attempts to do the same, the debtor can file a motion with the court to report the said action, asking the case be reopened to discuss this matter. It is the bankruptcy court’s responsibility to ensure that the discharge is not violated. The discharge puts a permanent statutory injunction prohibiting all creditors from taking any action like filing lawsuit etc. to collect a debt that has been discharged. Any creditor that attempts to do so, can be sanctioned by the court for violation of its order. Normal sanction for violation of discharge injunction is civil contempt which is punishable by a fine.

Can an Employer Terminate a Debtor’s Employment Discriminating because he/she was a Debtor or Failed to Pay a Discharge Debt?

The law prohibits against discrimination against debtors by both government and private employers; neither parties can discriminate against a person just because the person was a debtor, was insolvent before or during the case or has not paid a debt discharged in the case. Following forms of discrimination are prohibited under the law:

  • Termination of employee
  • Discriminating with respect to hiring
  • Denying, revoking, suspending or declining to renew a license, franchise, etc.

A private employer cannot be discriminated with respect to employment if discrimination is entirely due to the bankruptcy filing.

Procedure to Obtain the Copy of Discharge Order

In case a debtor misplaces or loses the discharge order, he/she can obtain another copy of the same by contacting the bankruptcy court clerk who entered the order. A nominal fee is charged by the clerk for searching the court records and additional fees for marking and certifying the copies. In case the case has been closed and archived, a retrieval fee is also charged, apart from a delay in obtaining the copy. Discharge order may also be available electronically. PACER system provides the public with electronic access to selected case information through PCs located in many clerk’s offices. Debtors can also access PACER. To do this, they must set up an account for acquiring access to PACER and must pay-per-page fee to copy or download documents that are filed electronically.