The Bankruptcy Discharge
The Bankruptcy discharge is the permanent court order granting a debtor’s discharge for debts incurred prior to filing. Corporations never get a discharge. Creditors can only violate the stay order in a Corporate case because the case never closes and never receives a discharge; only people can get the discharge. The bankruptcy code section about a debtor’s discharge is at 11 U.S.C. § 524(a)(2).
A bankruptcy discharge is the goal of most Chapter 7 and Chapter 13 bankruptcy cases. At the start of the case, all your assets are lumped together and called the bankruptcy estate. The discharge prevents creditors from even asking for payment after the debtor files. Violating the bankruptcy discharge with any collection action allows the debtor or trustee to collect attorney fees, damages, and punitive damages in some cases.
Only Consumers Get the Bankruptcy Discharge
After you file your bankruptcy case, you have a temporary order called a stay which prohibits creditors from collections during the bankruptcy. The stay order is stronger than the discharge order because it not only protects you from the actions of creditors but also prevents creditors from acts that prevent the bankruptcy trustee or bankruptcy court from doing their duties.
In Chapter 13, the stay lasts for 3 to 5 years. Private student loans may not be paid at all and are often charged off during that period. We usually do this to make the loans essentially uncollectible. The plan payments are often minor, but you get the protection of the stay.
I.R.S. cases must pay the priority part of any income tax debt during Chapter 13. But the repayment plan may only pay the I.R.S. and little or nothing more to unsecured creditors. The bankruptcy procedure provides that some cases can pay zero to the unsecured debt if that is all the debtor can afford in good faith.
When There is No Stay or Discharge?
Some people have no intention of paying for their homes. They will attempt to file one bankruptcy case after another to get the stay, preventing a foreclosure sale. When it becomes apparent the Debtor will not or cannot pay voluntarily; a creditor will ask to terminate the stay. The creditor will file this motion even if you fall one or two payments behind due to disability.
To prevent the home from returning to foreclosure court after a motion for relief from stay, the Debtor may catch up on the payments and pay the court costs and attorney fees for the creditor to keep the specific property. Attorney fees are often over 1,000 dollars.
If the motion for relief from stay is granted, the Debtor can ask for their case to be dismissed so they can eventually refile, but 11 U.S.C. § 109(g) will prevent them from filing a second petition and getting a stay for 180 days. The Debtor may request a stay if he can prove circumstances have changed. If two cases are filed in the prior year, there is no stay for a year.
The Debtor Must Complete the Personal Financial Management Course to Get the Discharge Order
There is no discharge if the debtor fails to finish the personal financial management course. That is right; you wasted your time and money. When the debtor completes the personal financial management course, it usually is automatically filed, and the discharge is issued when the case closes.
If the debtor completes the course after the case closes, you can fix this and get the bankruptcy discharge order by paying a filing fee reopening the Chapter 7 or 13 case, and filing the certification. But this is costly and time-consuming.
Prior Discharges, the Discharge Order, and Time Limits
You have to wait eight years after filing a Chapter 7 before you can file the next Chapter 7 and get another Chapter 7 bankruptcy discharge. This time runs from the date the first Chapter 7 case is filed until the next case is filed if there was a prior discharge.
In Chapter 13, you may not need to get a discharge and wait any time. If your only goal is to catch up on the mortgage, you can file a Chapter 13 immediately after Chapter 7 has eliminated any dischargeable debts. Then you only have to pay to catch up on the mortgage.
File Chapter 20 If You File Chapter 13 and Have Unsecured Debt
Filing Chapter 13 after Chapter 7 is often called the Chapter 20 strategy. This second Chapter 13 is usually not reviewed by the bankruptcy court because there are no unsecured debts to repay. You discharged them in the prior Chapter 7 case, so they do not have to be repaid in the second bankruptcy case.
The repayment plan payments are more affordable and primarily go to the mortgage instead of the credit cards. If you want the Chapter 13 bankruptcy discharge, you may have to wait until after the prior case to file a second case.
The Dischargeable Debts
Almost every debt you can imagine can be discharged. Perhaps it is best to discuss what is not a dischargeable debt so you can understand what is dischargeable. Bankruptcy is based on the Christian principle of forgiveness of debt or wrongs. If the debt occurs in everyday activity, it is generally dischargeable.
You cannot do willful and malicious injuries such as assaulting someone and expect the debt or wrong to be forgiven by the court. Acts of fraud or malicious injuries are generally non-dischargeable, but they must be objected to, or the bankruptcy discharge releases them anyway.
Some debts, such as income taxes and student loans, are not discharged in bankruptcy unless certain circumstances apply. Other debts, such as property taxes, are never discharged, although income taxes can be discharged three years after the return is due and properly filed.
When are Domestic Support Obligations Dischargeable Debts?
Domestic support obligations like alimony and child support are never dischargeable. Still, there is sometimes a question as to whether the debt is a property settlement, alimony, or child support.
The Chapter 13 bankruptcy procedure provides that a property settlement obligation is dischargeable, which can be a surprise to an ex-wife when she thinks her car payments were alimony due to her. But the option of discharging a debt from a divorce property agreement tends to only be possible in Chapter 13. Also, the debt must be to a spouse or child and not a third party for it to be a domestic obligation and non-dischargeable.
Discharging the Nondischargeable Debts
Almost every one of the nondischargeable debts has exceptions that allow you to discharge the debt anyway when it is reasonable. For instance, if paying a student loan creates an undue hardship, even student loans can be discharged. An experienced debtor’s attorney will spot when an undue hardship discharge order can apply.
Drunk driving accident debts are supposed to be nondischargeable debts, but they are often discharged because people often fail to object to the discharge before the deadlines. Debts due to fraud must also be objected to before the deadlines, or a party loses the right to object.
Commonly Discharged Debt Due to Bankruptcy Objection Deadlines
Medical bills, credit card debt, and personal loans are commonly dischargeable debts in a Chapter 7 bankruptcy. Unless you fraudulently obtained the debt, you should have no problems even if you committed minor fraud, such as overstating income or charging the debt just before filing. The debt is often a dischargeable debt because many creditors fail to object timely.
Creditors may have read that their debt is not dischargeable. But by failing to object, they violate the stay when the creditor attempts collection efforts after the discharge are granted.
Timing and Circumstances May Make Debts Dischargeable
Debts charged within 90 days before filing, especially for luxury items on a credit card, can be objected to in an adversary proceeding. But what makes debts dischargeable is the reasonableness of the circumstances. You may have charged for a Rolex watch just before having a heart attack and becoming disabled. But you probably didn’t expect the heart attack and intended to repay.
If a creditor were to object to a discharge under these circumstances, they would probably have to pay your attorney fees for defending such an allegation of fraud.
The Time to Object to the Discharge of a Debt is Limited
If a creditor alleges a debt was fraudulent, they have a limited amount of time to object to the debt being a fraud. This last date to object is found on the 341 notice.
Some debts do not require an objection, such as domestic support obligations such as child support or debts due to government agencies like the I.R.S. But other debts, such as a debt caused by a drunk driving accident, theft, or malicious injury, must be objected to before this date.
Filing Deadlines for the Debtor’s Dischargeable Debts
Just as the creditor has time limits, the Debtor also has time limits. Your prefiling debts are dischargeable debts. However, if a debt is incurred after the discharge, it is not a dischargeable debt. This often happens with apartment leases the debtor wants to abandon, but the debtor fails to move out before the bankruptcy filing.
The same principle works for cell phone contracts. Using the cell phone service after the filing means you owe for post-filing services that are not dischargeable debts. To be dischargeable debt, the debts owed must be pre-filing.
Discharged Debts
Credit Card debt which is charged up just before filing, can be one of the debts which are not subject to being discharged debt. Generally, credit card debt and medical bills are almost always discharged. Very few people have fraudulent intent when they have an appendectomy. They didn’t choose to get sick.
But they can choose to take one last trip to the department store and charge the card for that Rolex watch. If the washer had gone out just before filing bankruptcy, there probably would be no fraudulent intent. The bankruptcy code looks at several factors when the judge attempts to decide if the debt is fraudulent or not. If there was one last grab for items just before filing the bankruptcy petition, he looked at whether the debt was a necessity and the timing of the debt.
Personal Liability
The bankruptcy discharge only releases you from personal liability for certain debts. It does not typically eliminate the lien a secured creditor has. The Chapter 7 or Chapter 13 discharge only means you are no longer personally liable. The debtor’s discharge does not eliminate the first mortgage or lien on the home.
In a 13, the debtor’s plan payments may pay on the car, but the car lien remains at the end of the case unless the auto is paid off. If the car is not paid for, it can be repossessed after Chapter 7 or Chapter 13 bankruptcy.
How Discharges Can Eliminate Judicial Liens and Second Mortgages
It is often possible to strip a second mortgage in Chapter 13 when there is no equity after the first mortgage is paid.
In a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, it is possible to strip a judicial lien if there is no equity above your exemption and the prior mortgages and liens, such as tax liens.
Hardship Discharge and Early Discharges
In Chapter 13, if you cannot finish the plan, you can apply for an early or hardship discharge. You must not have caused the problem which prevents you from completing the plan. Often a sudden disability will qualify you for a hardship discharge. The plan must have repaid what Chapter 7 would have repaid.
This early discharge is essential because many people who were forced into a 13 often had to file due to disability which later became permanent. The federal rules allow this, but it changes from jurisdiction to jurisdiction.
The most famous example was when a woman in California could not complete her plan payments because she was sent to prison for murdering her husband and no longer had her income to pay the plan. She was denied early discharge because she caused her condition.
You Must Contact a Professional Bankruptcy Attorney!
At our law firm, we are happy to discuss your earlier discharge if you have questions. We have been handling civil contempt matters in violations of a bankruptcy court order for years. If you want to review what type of bankruptcy to file or whether a debt may be non dischargeable, make an appointment.
The attorney-client relationship is confidential, and making a mistake by even one day may make a debt non dischargeable. The schedules and plan must be appropriately filed, and your rights must be legally enforced to stop the telephone calls and further collection.
When the court enters your stay or discharge order, the debtor is protected. The protection is needed by the debtor and his family. When the stay is violated, take legal action to insure the debtor keeps the property.
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
Louisville Kentucky Chapter 7 • 341 Hearing • Video
Chapter 13 Step Plans & Chapter 20 Flexibility to Make a Plan
Chapter 7 or 13 Bankruptcy Trustees and the 341 Hearing
Trustee Questions at the Bankruptcy 341 Meeting
If you are considering bankruptcy, don’t delay because timing is often crucial. Don’t trust the bank or their attorney for advice. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.
