Bankruptcy releases a debtor from personal liability for certain types of debts through a process known as the bankruptcy “discharge.” Once the debtor’s discharge is granted by the bankruptcy court, he or she is no longer legally required to make payments on any debts covered by the discharge.
DISCHARGING DEBTS BY FILING BANKRUPTCY
From a legal perspective, bankruptcy’s discharge is a permanent order prohibiting a debtor’s creditors from taking any form of collection action on discharged debts – including legal action and communications with the debtor like phone calls, letters, email and other personal contact.
Although a debtor is not personally liable for discharged debts, a valid lien that has not been “avoided,” or made unenforceable in the bankruptcy case, won’t be included in the debtor’s discharge. Therefore, a secured creditor may enforce its right to repossess the collateral secured by its lien.
WHEN DOES THE DISCHARGE OCCUR?
The timing of the discharge varies, depending on the chapter under which the case is filed. In achapter 7 bankruptcy case, for example, the court usually grants the discharge promptly on expiration of the deadline for filing an objection to the debtor’s discharge and the deadline for filing a motion to dismiss the case on account of abuse, which is usually 60 days following the first date set for the 341 Creditors’ Hearing. Typically, the a chapter 7 discharge occurs about four months after the date a debtor files the petition with the clerk of Colorado’s bankruptcy court.
In non-business chapter 11 cases, chapter 12 cases involving family farmers and fishermen, and chapter 13 bankruptcies, the court generally grants the debtor’s discharge as soon as practicable after the debtor completes all of his or her payments under the plan. Because 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, but it may not be required if the US Trustee or bankruptcy administrator determines there are inadequate educational programs available or if the debtor is disabled, incapacitated or on active military duty in a combat zone.
HOW DO I GET A DISCHARGE?
In Colorado, unless there is pending litigation over objections to the discharge, the debtor will almost always receive his or her bankruptcy discharge. The Federal Rules of Bankruptcy Procedure require the bankruptcy court’s clerk to mail a copy of the order of discharge to all creditors, the US Trustee, the bankruptcy administrator and the trustee’s attorney (if applicable). The debtor and the debtor’s attorney also receive copies of the discharge order.
The notice is simply a copy of the final order of discharge. It informs creditors that the debts owed to them have been discharged and that they are prohibited from attempting any further collection activities. Creditors are also 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 MY DEBTS DISCHARGED OR ONLY SOME?
Not all debts are discharged. Debts that are eligible to be 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 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. The most common types of non-dischargeable debts are listed below:
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) aren’t automatically non-dischargeable. Creditors must ask the court to determine that these debts are excepted from discharge. If the creditor fails to make such a request, the types of debts set out in sections 523(a)(2), (4) and (6) will be fully discharged.
A broader range of debts are dischargeable under chapter 13 bankruptcy, including 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 his or her discharge only after completing the payments required by the court, 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 for debtors whose failure to complete his or her chapter 13 plan payments is due to circumstances beyond his or her 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 for family farmers and fishermen, under chapter 12 bankruptcy, if the failure to complete plan payments is caused by “circumstances for which the debtor should not justly be held accountable.”
DO I HAVE A RIGHT TO MY DISCHARGE? OR CAN CREDITORS OBJECT?
Under chapter 7 bankruptcy, 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 US Trustee’s Office. Creditors receive a notice shortly after the case is filed that sets forth 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 stated in the notice. Filing a complaint starts a lawsuit referred to in the bankruptcy court 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 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 its case.
In chapter 12 and chapter 13 bankruptcy, the debtor is usually entitled to a discharge upon completion of all payments under the plan. As in chapter 7, however, the debtor’s discharge may not occur under 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 the time frames discussed below. Unlike chapter 7 bankruptcy, 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 his or her court-required plan payments.
CAN I RECEIVE A SECOND DISCHARGE IF I FILE BANKRUPTCY AGAIN IN THE FUTURE?
Yes – but the bankruptcy court will deny a discharge in a later chapter 7 case if the debtor received a discharge under chapter 7 or chapter 11 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 MY DISCHARGE BE REVOKED?
The court may revoke a debtor’s discharge under certain circumstances. For example, the bankruptcy court-appointed trustee, a creditor or the US 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 chapter 11, 12, and 13 cases, if confirmation of a plan or the discharge is obtained through fraud, the bankruptcy court can revoke the order of confirmation or discharge.
CAN I PAY A DISCHARGED DEBT AFTER MY BANKRUPTCY CASE IS CLOSED?
A debtor who has received a discharge may voluntarily repay any discharged debt – even though it can no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it’s 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 I DO IF A CREDITOR ATTEMPTS TO COLLECT A DISCHARGED DEBT AFTER MY CASED IS CLOSED?
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 any 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.
CAN MY EMPLOYER FIRE ME BECAUSE I FILED BANKRUPTCY OR BECAUSE I FAILED TO PAY A DISCHARGED DEBT?
The Bankruptcy Code and Colorado law prohibit any discriminatory treatment of debtors by both governmental agencies and private employers. A governmental agency or private employer cannot discriminate against a person solely because the person filed bankruptcy, 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.
For more information, check out this previous blog post: Will I Lose My Job By Filing Bankruptcy in Colorado?
HOW CAN I GET A COPY OF MY DISCHARGE ORDER?
If you’ve lost or misplaced your discharge order, you can get another copy by contacting the clerk of Colorado’s bankruptcy court. 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 federal court’s PACER system provides the public with electronic access to selected case information through a personal computer located in many clerk’s offices. 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. For more information about PACER, you can visit the site by clicking here.
If you have questions about eliminating your debts by filing bankruptcy, contact us. Our experienced team can help you figure out whether bankruptcy can give you a debt free fresh start.