That might seem too good to be true, and there are indeed some drawbacks. Filing for bankruptcy and receiving a discharge will seriously impact your credit. You must establish to the court’s satisfaction that the discharge is financially necessary. You can’t simply ask the bankruptcy court to discharge your debts because you don’t want to pay them. You must complete all of the requirements for your bankruptcy case to receive a discharge. The court can deny you a discharge if you don’t take a required financial management course.
How a Bankruptcy Discharge Works
A copy of the discharge order will be mailed to all your creditors, as well as to the U.S. Bankruptcy Trustee, and the trustee’s attorney. The trustee personally handles your bankruptcy case. This order includes notice that creditors should take no further actions to collect on the debts, or they’ll face punishment for contempt. You can file a motion with the bankruptcy court to have your case reopened if any creditor tries to collect a discharged debt from you. The creditor can be fined if the court determines that it violated the discharge injunction. You can try simply sending a copy of your order of discharge to stop any collection activity, and then talk to a bankruptcy attorney about taking legal action if that doesn’t work.
Types of Bankruptcy Discharges
Individual debtors can file for Chapter 7 or Chapter 13 bankruptcy protection. The trustee will liquidate your nonexempt assets and divide the proceeds among your creditors in a Chapter 7 bankruptcy. Any debt that remains will be discharged or erased. You’ll enter into a payment plan over three to five years that repays all or most of your debts if you file for Chapter 13 protection. Any debt that remains at the end of your repayment plan will be discharged. A Chapter 13 bankruptcy allows some debts to be discharged that can’t be discharged in Chapter 7 proceedings. These include marital debts created in a divorce agreement (although not spousal support or alimony), as well as court fees, certain tax-related debts, condo and homeowners’ association fees, debts for retirement loans, and debts that couldn’t be discharged in a previous bankruptcy.
Chapter 7 Discharges
Section 523(a) of the Bankruptcy Code describes the types of debts that can’t be discharged in Chapter 7 proceedings. They include:
Domestic obligations such child support, alimony, and debts owed under a marriage settlement agreement Certain fines, penalties, and restitution resulting from criminal activities Certain taxes, including fraudulent income taxes, property taxes that came due within the previous year, and business taxes Court costs Debts associated with a DUI violation Condo or other homeowners’ association fees that were imposed after you filed for bankruptcy Retirement plan loans Debts that weren’t discharged in a previous bankruptcy Debts that you failed to list on your bankruptcy petition
Chapter 13 Discharges
Some debts can’t be discharged under Chapter 13 bankruptcy, including:
Child support and alimonyCertain fines, penalties, and restitution resulting from criminal activitiesCertain taxes, including fraudulent income taxes, property taxes that became due within the previous three years, and business taxesDebts you didn’t list on your bankruptcy petitionDebts incurred due to personal injury or death caused by drunk drivingDebts arising from fraud or recent luxury purchases
Creditors can ask that certain debts not be discharged, even if discharge isn’t prohibited by statute. These include debts incurred through fraud, any luxuries you charged in the months preceding your bankruptcy, and debts arising from willful and malicious acts like arson, kidnapping, vandalism, libel, or slander.
Disadvantages of a Bankruptcy Discharge
Your bankruptcy protection doesn’t extend to joint account holders or cosigners on any of your debt obligations. Only your personal liability for the debt is removed when you receive your bankruptcy discharge. Your cosigner remains on the hook for the entire balance of the debt. Creditors can still collect from, or even sue, cosigners and joint account holders for discharged debts. Your bankruptcy discharge will appear on your credit report and will affect your credit score for seven years after you file for Chapter 13 protection. It will appear and affect your score for 10 years from the date you file for Chapter 7 bankruptcy. Accounts associated with your bankruptcy might be deleted from your credit report if the date of delinquency preceded your bankruptcy filing.
How Long Does It Take to Get a Bankruptcy Discharge?
Discharge for a Chapter 7 bankruptcy usually occurs about four months after the date you file your bankruptcy petition. The discharge occurs after all the payments under the repayment plan have been made in a Chapter 13 bankruptcy, typically three to five years.
