A bankruptcy discharge is the statutory forgiveness of most debts, most of which were incurred before the filing of bankruptcy (prepetition debts). This is the essential feature of bankruptcy that gives debtors their fresh start, which is one of the main purposes of bankruptcy law. A right to receive a discharge as a matter of law without the assent of creditors distinguishes it from state law insolvency proceedings.
Another main objective of bankruptcy is to treat creditors fairly, so that they can be paid as much as possible while still also releasing the debtor from the oppression of debt.
The fair treatment of creditors and public policy both work to limit the extent of the discharge for debtors. The bankruptcy code was not designed so that debtors can take advantage of creditors for their own profit, and so various provisions of the bankruptcy code limit the debts that are discharged if they were incurred dishonestly or by fraud. This includes debts that were incurred on credit cards where the debtor entered false information on the credit application and also includes major debts for luxury goods that were incurred shortly before filing for bankruptcy. However, a creditor must challenge the discharge of these debts, and the court must notify the debtor and conduct a hearing; otherwise, the debts will be discharged.
If the debtor is abusing the bankruptcy process, then either the trustee or a creditor can move to have the case dismissed. A dismissal of a bankruptcy case not only lifts the automatic stay, but prevents the debtor from receiving a discharge at all.
Which debts are discharged and which are not depends on the bankruptcy chapter that the debtor filed under, but there are several types of debts that are never discharged:
- domestic support obligations
- fines and penalties
- most recent taxes
- debts incurred by personal injury or death while driving intoxicated
The liability for secured debt is discharged, but the debtor can only keep the property by paying for it. Under the rehabilitative bankruptcies— Chapter 11, 12, and 13 — the debtor continues paying on secured debt and pays for any arrearage in the payment plan that is central to these bankruptcies. In Chapters 7, the individual debtor can surrender the secured property, pay for it in a lump sum, or sign a Reaffirmation Agreement to keep it.
Commonly, only prepetition debts are discharged. In an involuntary Chapter 7 case brought by a creditor rather than the debtor, discharged debts also includes debts incurred between when the case was filed and when the actual bankruptcy case commences, if the Chapter 7 bankruptcy is approved by the court. In Chapter 12 and 13, all debts provided for in the payment plan are discharged. Note that provided for simply means that they were listed in the payment plan, even if no payments were provided in the plan.
In Chapter 11, not only are prepetition debts discharged, but also postpetition debts that were incurred before the confirmation plan. If the debtor is a business, then the discharge takes effect when the confirmation plan is approved. However, an individual must successfully complete the payment plan before the discharge is granted.
When bankruptcy is filed, the automatic stay prohibits the collection of debts by the debtor's creditors during the bankruptcy process. If the debtor receives a discharge of the debts, then the injunction provided by §524(a) succeeds the automatic stay and enjoins any further action to collect the discharged debts. If a creditor violates the injunction against collecting the debt, then the court can issue a civil contempt order.
The bankruptcy code also prohibits discrimination solely because of the bankruptcy by government entities or private employers. Courts, however, have differed as to what solely implies. Some courts have ruled that discrimination had taken place if the major reason for the discrimination was the bankruptcy, while other courts have ruled that there can be no other factor involved.
Generally, waivers of certain discharged debts are not enforceable except in specific circumstances. Waivers must be in writing and approved by the court. A reaffirmation agreement, for instance, must satisfy these and other requirements to be enforceable. A debtor may volunteer to pay a debt, but the creditor cannot harass or intimidate the debtor into doing so.
Note that although debts canceled by discharge are not taxable income, the bankrupt may have to reduce certain tax attributes, such as carryovers of losses and credits that would otherwise be available to reduce future taxes, by a proportional amount of the canceled debt.
Chapter 7 Discharge
A Chapter 7 discharge is only available to an individual debtor. Although a business may file a Chapter 7, no discharge is granted, but instead, the entire business is liquidated. Anyone buying the business will be liable for any remaining debts. Hence, the business is usually terminated.
Generally, almost all debts from credit cards, medical debts, lawsuits, personal loans, and obligations from contracts are dischargeable. However, priority debts, such as domestic support obligations, administrative expenses of the bankruptcy — including court fees and certain taxes — are not dischargeable. Student loans are not dischargeable unless the debtor can successfully petition the court that the debt presents an undue hardship, meaning that a minimal standard living cannot be maintained while paying the student loan and that the debt will remain an undue hardship for the term of the loan. However, the debtor must have demonstrated a good-faith effort to repay the loan.
A Chapter 7 discharge is granted to an individual debtor if there have been no challenges, which is usually the case. Creditors have 60 days after the creditors meeting to challenge the discharge of its debt. If there are no challenges and if the debtor did not sign an reaffirmation agreement, then after about 3 months after the creditors meeting, the court sends the debtor the notice of the discharge. If the debtor signed a Reaffirmation Agreement and is not represented by an attorney, then the court requires the debtor to appear before it so that it can ascertain whether the debtor understands the Reaffirmation Agreement and that the debt will continue beyond bankruptcy. The debtor can either accept or cancel the agreement. Regardless, the discharge is granted at this hearing.
A Chapter 7 discharge relieves the debtor of the liability of most prepetition debts and some postpetition debts, such as the claims resulting from the rejection of executory contracts or the avoidance of a transfer.
Bankruptcy Code Source: Title 11, §727. Discharge
Chapter 13 Discharge — the Super-Discharge
A Chapter 13 discharge is available only to an individual debtor — not a business — and is only granted after the debtor successfully completes the payment plan. However, the court can grant an early discharge if the debtor is unable to complete the payment plan because of undue hardship, such as if the debtor fell ill and was unable to continue working. However, an undue hardship discharge limits the number of debts that will be discharged than if the full payment plan were successfully completed.
After the debtor has completed the repayment plan, he must submit the form Debtor's Affidavit Requesting Discharge, certifying that he has met each of the requirements for receiving a Chapter 13 discharge.
Because the debtor makes a greater attempt to repay his debts under a Chapter 13 payment plan, the number of debts that can be discharged exceeds for Chapter 7, although this advantage has been lessened by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
Debts that are dischargeable under Chapter 13 but not Chapter 7 include:
- marital debts from a divorce or separation agreement;
- debts from retirement plan loans;
- condominium, cooperative, and homeowner association fees;
- debts for loans to pay nondischargeable tax debts;
- administrative and court fees incurred by the bankruptcy case;
- and dischargeable debts that were not discharged by a previous bankruptcy.
Because the Chapter 13 discharge is broader than under other classes of bankruptcy, it is sometimes called a super-discharge.
Bankruptcy Code Source: Title 11, §1328. Discharge
Chapter 11 Discharge
Chapter 11 is mostly used by businesses, although a few individuals with very large debts also are required to use it, if they do not want to file for Chapter 7. Unlike a Chapter 7 discharge, the Chapter 11 discharge is available for both businesses and individuals; however, when the discharge is effective differs for the 2 types of debtor.
For businesses, the discharge is effective when the Chapter 11 confirmation plan is approved. For individuals, the discharge is not granted until the debtor successfully completes the payment plan; hence, it is much like Chapter 13.
The order for confirmation can be revoked if it was obtained by fraud, but a party in interest must request revocation within 180 days of the confirmation order, and only after a notice and a hearing to determine if the revocation should be granted.
Like Chapter 7, most debts that arose prepetition are discharged, including some debts that arise postpetition from prepetition events.
However, if the Chapter 11 eventually results in the liquidation of the debtor, then the Chapter 11 discharge is no different from Chapter 7, since the liquidation in either case remains essentially the same thing. If the debtor is a corporation or other business entity, then it ceases to exist. If the debtor is an individual, then the Chapter 11 discharge operates exactly like a Chapter 7, with the same exclusions from discharge and with the same circumstances that can result in a denial of a discharge.
Bankruptcy Code Source: Title 11, §1141. Effect of confirmation
Chapter 12 Discharge
Chapter 12 is available only to farmers and fisherman, even if they are organized as a business, and works much like Chapter 13. However, a few specialized types of debt are excluded from discharge under Chapter 12 that are not excluded under Chapter 13.
One advantage of a Chapter 12 discharge is that there is no time restriction on receiving a Chapter 12 discharge after a prior discharge under any chapter. The hardship discharge is also available.
Both the Chapter 12 and Chapter 13 discharges can be revoked on grounds of fraud within 1 year of the discharge.
Bankruptcy Code Source: Title 11, §1228. Discharge
Discharge Waiting Periods to Restrict Serial Filings
To restrict serial filings, there is a waiting period for receiving discharges from successive filings. If the bankruptcy petitioner received a previous discharge, then he may have to wait to receive another discharge. The time period is measured from the commencement of the previous case to the commencement of the current case — the date of the discharges does not matter.
- General Format: Current bankruptcy chapter.
- Number of years that must have passed since the commencement of the previous bankruptcy — which is the filing date for voluntary bankruptcies and the date for the order for relief for involuntary cases— and the commencement of the current case.
- Chapter 7
- 8 years from a previous Chapter 7, Chapter 11, or Chapter 12 filing. §727(a)(8)
- from a previous Chapter 13 filing: §727(a)(9)
- 6 years if less than 70% of unsecured claims were paid in the Chapter 13 payment plan;
- no waiting period if
- 100% of unsecured claims were paid in the previous Chapter 13 payment plan, or
- at least 70% of unsecured claims were paid in the payment plan that was proposed in good faith by the debtor, using his best effort.
- Chapter 11
- No waiting period for a reorganization.
- 8 years from a previous Chapter 7, 11, or 12 filing if the current Chapter 11 is a liquidation. §1141(d)(3)
- Chapter 12
- No waiting period.
- Chapter 13
- within 4 years of a previous Chapter 7, 11, or 12 filing. §1328(f)(1)
- within 2 years of a previous Chapter 13 filing. §1328(f)(2)