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The Discharge in Bankruptcy
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 The
bankruptcy discharge varies depending on the type
of case a debtor files: chapter 7, 11, 12, or
13. Bankruptcy Basics attempts to answer some
basic questions about the discharge available
to individual debtors under all four chapters
including:
a. Discharge in bankruptcy
b. Timing of the discharge
c. Receipt of discharge
d. Debts that can be discharged
e. Right to a discharge
f. Number of discharges
g. Revoke a discharge
h. Discharge debt payment
i. Collection by creditor
j. Employment and failure
to pay discharge
k. Obtain another copy of the
discharge order
What
is a discharge in bankruptcy?
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.
When does
the discharge occur?
The timing of the discharge varies, depending
on the chapter under which the case is filed.
In a chapter 7 (liquidation) case, for example,
the court usually grants the discharge promptly
on expiration of the time fixed for filing a complaint
objecting to discharge and the time fixed for
filing a motion to dismiss the case for substantial
abuse (60 days following the first date set for
the 341 meeting). Typically, this occurs about
four months after the date the debtor files the
petition with the clerk of the bankruptcy court.
In individual chapter 11 cases, and in cases under
chapter 12 (adjustment of debts of a family farmer
or fisherman) and 13 (adjustment of debts of an
individual with regular income), the court generally
grants the discharge as soon as practicable after
the debtor completes all payments under the plan.
Since a chapter 12 or chapter 13 plan may provide
for payments to be made over three to five years,
the discharge typically occurs about four years
after the date of filing. The court may deny an
individual debtor's discharge in a chapter 7 or
13 case if the debtor fails to complete "an
instructional course concerning financial management."
The Bankruptcy Code provides limited exceptions
to the "financial management" requirement
if the
U.S. trustee or bankruptcy
administrator determines there are inadequate
educational programs available, or if the debtor
is disabled or incapacitated or on active military
duty in a combat zone.
How does the
debtor get a discharge?
Unless there is litigation involving objections
to the discharge, the debtor will usually automatically
receive a discharge. The Federal Rules of Bankruptcy
Procedure provide for the clerk of the bankruptcy
court to mail a copy of the order of discharge
to all creditors, the
U.S.
trustee, the trustee in the case, and the trustee's
attorney, if any. The debtor and the debtor's
attorney also receive copies of the discharge
order. The notice, which is simply a copy of the
final order of discharge, is not specific as to
those debts determined by the court to be non-dischargeable,
i.e., not covered by the discharge. The
notice informs creditors generally that the debts
owed to them have been discharged and that they
should not attempt any further collection. They
are cautioned in the notice that continuing collection
efforts could subject them to punishment for contempt.
Any inadvertent failure on the part of the clerk
to send the debtor or any creditor a copy of the
discharge order promptly within the time required
by the rules does not affect the validity of the
order granting the discharge.
Are all
of the debtor's debts discharged or only some?
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 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, 11, and 12. A more
limited list of exceptions applies to cases under
chapter 13.
Generally speaking, the exceptions to discharge
apply automatically if the language prescribed
by section 523(a) applies. The most common types
of nondischargeable 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
overpayments, 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.
The types of debts described in sections 523(a)(2),
(4) and(6) (obligations affected by fraud or maliciousness)
are not automatically excepted from discharge.
Creditors must ask the court to determine that
these debts are excepted from discharge. In the
absence of an affirmative request by the creditor
and the granting of the request by the court,
the types of debts set out in sections 523(a)(2),
(4) and (6) will be discharged.
A slightly broader discharge of debts is available
to a debtor in a chapter 13 case than in a chapter
7 case. Debts dischargeable in a chapter 13, but
not in chapter 7, include debts for willful and
malicious injury to property, debts incurred to
pay non-dischargeable tax obligations, and debts
arising from property settlements in divorce or
separation proceedings. Although a chapter 13
debtor generally receives a discharge only after
completing all payments required by the court-approved
(i.e., "confirmed") repayment
plan, there are some limited circumstances under
which the debtor may request the court to grant
a "hardship discharge" even though the
debtor has failed to complete plan payments. Such
a discharge is available only to a debtor whose
failure to complete plan payments is due to circumstances
beyond the debtor's control. The scope of a chapter
13 "hardship discharge" is similar to
that in a chapter 7 case with regard to the types
of debts that are excepted from the discharge.
A hardship discharge also is available in chapter
12 if the failure to complete plan payments is
due to "circumstances for which the debtor
should not justly be held accountable."
Does the
debtor have the right to a discharge or can creditors
object to the discharge?
In chapter 7 cases, the debtor does not have an
absolute right to 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. Creditors
receive a notice shortly after the case is filed
that 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 referred to in bankruptcy as
an "adversary proceeding."
The court may deny a chapter 7 discharge for any
of the reasons described in section 727(a) of
the Bankruptcy Code, 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 12 and chapter 13 cases, the debtor
is usually entitled to a discharge upon 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.
Can a
debtor receive a second discharge in a later chapter
7 case?
The court will deny a discharge in a later chapter
7 case if the debtor received a discharge under
chapter 7 or chapter 11 in a case filed 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 (1) the debtor paid all "allowed
unsecured" claims in the earlier case in
full, or (2) 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.
A debtor is ineligible for discharge under chapter
13 if he or she received a prior discharge in
a chapter 7, 11, or 12 case filed four years before
the current case or in a chapter 13 case filed
two years before the current case.
Can the
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.
In a chapter 11, 12 and 13 cases, if confirmation
of a plan or the discharge is obtained through
fraud, the court can revoke the order of confirmation
or discharge.
May the debtor
pay a discharged debt after the bankruptcy case
has been concluded?
A debtor who has received a discharge may voluntarily
repay any discharged debt. A debtor may repay
a discharged debt even though it can 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.
What
can the debtor do if a creditor attempts to collect
a discharged debt after the case is concluded?
If a creditor attempts collection efforts on a
discharged debt, the debtor can file a motion
with the court, reporting the action and asking
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 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.
May
an employer terminate a debtor's employment solely
because the person was a debtor or 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.
How can
the Debtor obtain another Copy of the Discharge
Order?
If the debtor loses or misplaces the discharge
order, another copy can be obtained by contacting
the clerk of the bankruptcy court that entered
the order. The clerk will charge a fee for searching
the court records and there will be additional
fees for making and certifying copies. If the
case has been closed and archived there will also
be a retrieval fee, and obtaining the copy will
take longer.
The discharge order may be available electronically.
The PACER system provides the public with electronic
access to selected case information through a
personal computer located in many clerk's offices.
The debtor can also access PACER. Users must
set up an account to acquire access to PACER,
and must pay a per-page fee to download and copy
documents filed electronically.
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