Bankruptcy is about writing off or “discharging” debts. The timing of discharge is quite different in Chapter 7 and 13; both are permanent.
The main goal of most consumer bankruptcy cases is to get a fresh financial start through writing off debts. In bankruptcy the legal term for write-off is “discharge.”
In virtually all successful Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” cases there will be a discharge of some or all of your debt.
In Chapter 7
People file Chapter 7 cases mostly to get a quick discharge of their debts. That is, the discharge of those debts that can be discharged, and that they want discharged.
Most debts qualify for discharge. We’ll dig into those that don’t next week. In the meantime Section 523 of the U.S. Bankruptcy Code covers “Exceptions to discharge.”
You may not want to discharge certain select debts that are secured by something you want to keep. Possible examples are your vehicle loan and home mortgage. You may want to formally “reaffirm” such debts—agree to continue to be liable in return for keeping the collateral. See Section 524(c) of the Bankruptcy Code. You definitely want to discuss thoroughly whether you should reaffirm any of your debts with your bankruptcy lawyer.
The big benefit of Chapter 7 is speed. Most cases finish within 4 months of filing, and do so with a court order discharging your debts. Rarely, the debtor has to give up some asset(s) to get the discharge. Here is an official Chapter 7 Order of Discharge that would come at the end of the case.
In Chapter 13
The road to discharge is much longer under Chapter 13. Plus most, though not all, cases require paying something to your creditors before discharge.
Whether and how much you pay depends on a bunch of circumstances. Chapter 13 involves proposing and getting bankruptcy court approval of an official plan of payments. That plan usually gives you 3 to 5 years to do what you need to do. Often that includes paying special debts such as “secured” and “priority” ones that handles for you much better than under Chapter 7. The “general unsecured” debts usually only get paid any money that’s left over. (See our last blog post for descriptions of these 3 main categories of debt.)
Only after your successful completion of this payment plan do you get a discharge of all or most of your remaining debts. Here is an official Chapter 13 Order of Discharge that would come at the end of the case.
What Is the Exact Legal Effect of the Discharge of Debts?
If you look at either the Chapter 7 or Chapter 13 Order of Discharge linked to above you’ll notice in both the pertinent language is extremely short and sweet:
IT IS ORDERED: A discharge under [the pertinent section of the Bankruptcy Code] is granted to [the debtor].
The legal effect of this discharge is described in Section 524(a)(2) of the Bankruptcy Code as follows:
“A discharge… operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor… .”
What does this mean? There’s a short Explanation of Bankruptcy Discharge in the two Orders of Discharge linked to above, with both containing the following language:
Creditors cannot collect discharged debts
This order means that no one may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.
The discharge court order is permanent, and the injunction that flows from it is permanent. Because of the penalties, most creditors are careful to comply. If you have any indication that any of your creditors is not complying, tell your bankruptcy lawyer.
Our next blog post will get into the special kinds of debts that may not get discharged.