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FAQ'S

 Covered in this Article:

• What is a chapter 7 discharge?
• Are all of a person’s debts discharged in a bankruptcy?
• How does a discharge affect a person?
• Are there some debts that are never discharged?
• Are there any circumstances wherein a person can still promise to pay a discharged debt after the case is closed?
• Are all of the debtor’s debts discharged in a bankruptcy?
• Can my creditors object to my case receiving a discharge?
• Can a debtor receive a second discharge in a second chapter 7 case?
• Can the discharge ever be revoked?
• Can a debtor pay a discharged debt after the bankruptcy case is closed?
• What is the legal recourse for a debtor if a creditor attempts to collect a discharged debt after the case is closed?
• May an employer terminate a debtor’s employment solely because he was a debtor or because he failed to pay a discharged debt?

1. What is a chapter 7 discharge?

A discharge is a court order that releases a debtor from all of his dischargeable debts. Moreover, the discharge orders the creditors to stop any and all attempt to collect the debt from the debtor. A debt that is discharged means that the the debtor is released from any obligation to pay it. There are certain types of debts that are not discharged in a chapter 7. The discharge is issued  by the United States Bankruptcy Court at the conclusion of a chapter 7 or 13 case. A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.

Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.

 2. Are all of a person’s debts discharged in the bankruptcy?

Most of the person’s debts will be discharged. However, there are exceptions. The following exceptions are as follows:

• Only debts listed on your bankruptcy schedules can be discharged. If you have a debt that you owed at the time the bankruptcy was filed, but do not have it listed, it will not be discharged.
• Only debts owed from the period before the bankruptcy was filed will be discharged. This bankruptcy discharge will not discharge debts that you became obligated to pay during the bankruptcy. Your discharge will only cover your personal obligation to pay debts. It will not cover cosigners on your debts and it will have no effect on most security interests, like home mortgages and encumbrances on motor vehicles.

3. How does a discharge affect a person?

If there are no objections are filed, then a person will receive a discharge in bankruptcy. The discharge “cancels” certain debts that you had at the time the bankruptcy was filed. A bankruptcy discharge also has the following effects:

• It voids any judgment determining personal liability on a debt; and
• It prohibits creditors from taking any action to collect a debt as a personal liability of yours.

However, if a debt is secured by a lien on any property that belongs to a person (i.e., a home mortgage or a car loan), then the discharge does not prevent the creditor from repossessing that property. Generally, a person must pay a secured debt according to its terms to avoid repossession.

Also, while a discharge relieves a person of responsibility, it does not relieve anyone else who may be responsible with you on that debt, i.e., a co-signer or co-maker. Therefore, if a person’s parent, friend, or relative cosigned on the loan papers, then the creditor will go after the co-signer. The co-signer may be sued by the creditor, and that creditor does not even have to wait until the case is over. This can be a very embarrassing situation for both parties. Moreover, it often ends many family relationships.

A debtor will not be required to appear in court to obtain his discharge order. If the court receives no objections to the debtor’s discharge, then the debtor can expect to receive an order, signed by the Judge, in the mail in approximately three months after the meeting of the creditors. When a debtor receives the discharge order, he should put it in a safe place with his other valuable and important papers.

4. Are there some debts that are never discharged?

Unfortunately, many debts are not dischargeable. It seems that every year the list of non-dischargeable debts gets longer and longer. The bankruptcy code prohibits the discharge of certain types of debts. The list includes:

• Recent real estate (approximately two years old) and income taxes (approximately three years old).
• Student loans, unless you file a complaint in bankruptcy court claiming and “undue hardship,” i.e. very unusual and compelling circumstances.
• Certain fines and costs (approximately three years old).
• Debts arising from a judgment against you as a result of your operation of a motor vehicle while you were intoxicated.
• Consumer debts owed to a single creditor in an amount in excess of $1,000 for luxury goods or services within 60 days of the date you file, or for cash advances on your credit line aggregating more than $1,000 within 60 days of your filing date.
• If a creditor files a complaint and proves that your debt to them arises from fraud, breach of fiduciary duty, larceny, embezzlement, defalcation or a material lie on an application for credit, a drunk driving accident restitution for damage you caused, or for willful injuries you caused to another.
• Alimony, maintenance and support to a spouse, former spouse or a child.
• If a creditor and you later have a dispute as to whether a debt was discharged, either of you can ask the court to make that determination for you and enter judgment accordingly.

5. Are there any circumstances wherein a person can still promise to pay a discharged debt after the case is closed?

Yes, these circumstances may occur when the debtor signs a reaffirmation agreement. A reaffirmation agreement is a legally binding contracts between the debtor and a creditor. Here, the debtor agrees to be liable once again to the creditor after the entry of the discharge order. Reaffirmation agreements must always be approved by the court. Court approval is necessary to discourage unscrupulous creditors from coercing a debtor to become liable to the creditor after the debtor has been discharged.

In most cases, a bankruptcy court usually discourages reaffirmation agreements for credit card debts. However, reaffirmation agreements are almost always approved for car loans. After the bankruptcy, a debtor needs a vehicle to live and to get back and forth from work. The court requires that reaffirmation agreements:

• Must be voluntary;
• Must not place too heavy a burden on you or your family;
• Must be in your best interests; and
• Can be canceled anytime before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.

If you are an individual and if you are not represented by an attorney, then the must hold a hearing to decide whether to approve the agreement. The agreement will not be legally binding until the court approves it. If a debtor reaffirms a debt, which the Bankruptcy court approves and fail to pay it, it is the same as if you never filed bankruptcy respecting that debt (your other debts are still discharged). This means the creditor can sue you and take your property! This is not a good position to be in!

6. Are all of the debtor’s debts discharged in a bankruptcy?

Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after the bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor’s drunken driving).

There are 19 categories of debt excepted from discharge under chapters 7 and 13. Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523(a) applies. The most common types of non-dischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit over payments, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

7. Can my creditors object to my case receiving a discharge?

In a chapter 7 case the debtor does not have an absolute legal right to receive a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. All creditors receive a notice shortly after the case is filed. This notice sets forth much important information, including the deadline for objecting to the discharge. To object to the debtor’s discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit that is referred to in a bankruptcy as an “adversary proceeding.”

The court may deny a chapter 7 discharge for many different grounds. The most common reasons are; including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier case commenced within certain time frames (discussed below) before the date the petition was filed. If the issue of the debtor’s right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential to the objection.

In chapter 13 case, the debtor is usually entitled to a discharge upon the completion of all payments under the plan. As in chapter 7, however, discharge may not occur in chapter 13 if the debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in chapter 13 if he or she received a prior discharge in another case commenced within time frames discussed the next paragraph. Unlike chapter 7, creditors do not have standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment plan, but cannot object to the discharge if the debtor has completed making plan payments.

8. Can a debtor receive a second discharge in a second chapter 7 case?

The court will deny a discharge in a later chapter 7 case if the debtor has received a discharge under chapter 7  within eight years before the second petition is filed. The court will also deny a chapter 7 discharge if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of the filing of the second case unless (a) the debtor paid all “allowed unsecured” claims in the earlier case in full, or (b) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort.

9. Can my discharge be revoked?

The court may revoke a discharge under certain circumstances. For example, a trustee, creditor, or the U.S. trustee may request that the court revoke the debtor’s discharge in a chapter 7 case based on allegations that the debtor; obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the bankruptcy code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case. Typically, a request to revoke the debtor’s discharge must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will decide whether such allegations are true and, if so, whether to revoke the discharge.

10. Can a debtor pay a discharged debt after the bankruptcy case is closed?

A debtor who has receives a discharge may voluntarily repay any discharged debt. A debtor may repay a discharged debt even though it many no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it is owed to a family member, or because it represents an obligation to an individual for whom the debtor’s reputation is important, such as a family doctor.

11.  What is the legal recourse for a debtor if a creditor attempts to collect a discharged debt after the case is closed?

If a creditor attempts collection efforts on a discharged debt, then the debtor can file a motion with the court. Moreover, a debtor can report the stay violation and request that the case be reopened to address the matter. The bankruptcy court will often do so to ensure that the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of a lawsuit, designed to collect a discharged debt. A creditor can also be sanctioned by the court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by a fine.

12. May an employer terminate a debtor’s employment solely because he was a debtor or because he failed to pay a discharged debt?

The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.