The primary goal of filing a Chapter 7 “straight bankruptcy” is to “discharge”—legally write off—your debts. So, how does this happen?
Here’s how the discharge of debts works:
1. You will almost always receive a general discharge of your debts in a Chapter 7 case. The discharge will usually apply to many, and sometimes even to all, of your debts. You just need to cooperate with the bankruptcy laws. According to Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” except in some relatively unusual circumstances:
- You have to be an “individual” to get a discharge. Corporations and other kinds of business entities do not receive a discharge of debts, only actual people do!
- You can’t get a discharge if you have already received a discharge too recently in a prior bankruptcy case. Specifically, you won’t get a new discharge of your debts in a Chapter 7 case if:
- you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
- you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
- If you hide or destroy assets, or conceal or destroy records about your financial condition.
- If you make a false oath or withhold information or records about your property or financial affairs, in connection with your Chapter 7 case.
2. Each one of your debts will be discharged, except for those which fit a specific exception stated in the law. Section 523 of the Code lists those “exceptions to discharge.” The main ones include:
- recent income taxes
- debts incurred through fraud or misrepresentation, such as most bounced checks, and those credit card cash advances and purchases done while intending not to pay the debt
- debts not listed on time on the bankruptcy schedules
- money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
- child and spousal support
- claims against you for intentional injury to another person or property
- most but not all student loans
- claims against you for causing injury or death to someone by driving while intoxicated
3. A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524 of the Bankruptcy Code, the court’s discharge order acts as an injunction against the creditor from taking any action, on its own or through a court procedure, to “collect, recover, or offset any such debt.” If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay the debtor damages.