Chapter 7 Bankruptcy Discharge: What It Is and How It Works

No matter what type of bankruptcy you seek under the U.S. Bankruptcy Code, there is a good chance some or all of your debt will be dischargeable. A discharge means that, after your bankruptcy case is complete, you are no longer liable for the debt and will not have to pay it back.

A bankruptcy discharge also means that the creditors you owe, such as a hospital or credit card company, cannot take collection action against you once the court discharges the debt. This is one of the primary reasons people opt for Chapter 7 bankruptcy instead of a Chapter 13 bankruptcy case.

In this article, we will explain what it means for a debt to be discharged in bankruptcy. We will also discuss the types of debt that are dischargeable as compared to those that are non-dischargeable.

If you’re considering filing bankruptcy but aren’t sure if Chapter 7 is the best option, contact a local bankruptcy attorney. They’ll review your financial situation and advise you on how best to proceed.

Bankruptcy Basics: Chapter 7 vs Chapter 13

People often file for Chapter 7 bankruptcy to get rid of their debts and enjoy a fresh start. In most Chapter 7 bankruptcy cases, the debtor has significant credit card debt, medical bills, and other unsecured debt. At the end of their bankruptcy, the trustee or bankruptcy judge discharges most, if not all, of this debt.

Debtors who file a Chapter 13 bankruptcy are interested in reorganizing or restructuring their debt, not eliminating it. This is usually because the individual has a home they want to keep or other valuable personal property. At the completion of a Chapter 13 repayment plan, the person still owes their debts, but they are in a much better position to manage their monthly payments.

If you’re overwhelmed by debt and don’t have much in the way of real estate or personal property, Chapter 7 may be your best option. If the bankruptcy trustee approves your filing, the bankruptcy court will discharge the debts you listed on your bankruptcy schedule, and you will emerge debt-free.

If you do pursue a Chapter 7 bankruptcy case, you must pay the requisite filing fee. Fees change periodically, but you should expect to pay around $350. If you cannot afford to pay the fee in full, you can request a fee waiver or pay it in installments.

You must also submit proof that you attended a mandatory credit counseling course within 180 days of filing your bankruptcy.

What Is a Chapter 7 Debt Discharge?

A Chapter 7 bankruptcy discharge is a permanent court order banning lenders from taking collection action on debts you included in your bankruptcy petition. Furthermore, creditors can no longer negatively report the account on your credit report.

A bankruptcy discharge prevents creditors from engaging in the following:

• Making collection calls

• Issuing a wage garnishment

• Sending dunning or demand letters

• Charging a debtor interest or late fees

• Reporting an open balance on a discharged account

• Reporting the status of an account as anything other than “Discharged in Bankruptcy”

If you notice that one of your creditors does any of the above either during bankruptcy proceedings or after your case is closed, let your bankruptcy attorney know immediately. This is a violation of the bankruptcy laws, the Fair Credit Reporting Act (FCRA), and the Fair Debt Collection Practices Act (FDCPA).

Once the bankruptcy court discharges your Chapter 7 case, your delinquent accounts will change to “Discharged in Bankruptcy” status on your credit report. Of course, when lenders see this on your credit history, they may be reluctant to loan you money. However, over time, you will begin rebuilding your credit and, hopefully, find yourself in a much better financial position.

When Does the Discharge Happen?

The bankruptcy process can take time. It’s not just a matter of filing paperwork with the court. Depending on the type of bankruptcy case you file, it may take months or even a year to resolve. This means the timing of your bankruptcy discharge varies.

In a liquidation bankruptcy case, the court usually grants the discharge promptly after one of the two following events:

• The time limit for creditors to object to bankruptcy passes

• The deadline for creditors to file a motion to dismiss your case for substantial abuse has passed

In most cases, your creditors have 60 days from the First Meeting of Creditors to challenge the discharge or file a motion to dismiss.

Most Chapter 7 bankruptcy filings are completed within three to four months. However, some cases take longer. For example, if the trustee has to investigate your assets, it may delay your discharge. The same thing may happen if your creditors challenge your ability to include their debts in your bankruptcy petition.

Which Debts Are Dischargeable in Chapter 7 Bankruptcy?

When you file your bankruptcy petition, you must attach schedules of your debts and assets. The different types of schedules are as follows:

• Schedule D: Creditors with secured claims (mortgages, car loans, etc.)

• Schedule E: Creditors holding priority unsecured debts (recent tax debt, child support, etc.)

• Schedule F: Non-priority unsecured claimants (credit card debt, personal loans, medical bills, etc.)

Some of the more common types of dischargeable debts include:

• Credit card debt

• Unsecured personal loans

• Payday loans

• Past-due utility bills

• Medical bills

Unless there are special circumstances, the trustee should have no problem discharging the above debts in your Chapter 7 bankruptcy case.

Generally, the debts included on your Schedule F are dischargeable. For people who file Chapter 7 bankruptcy, these make up a lion’s share of their debt. Debts that fall under Schedules D and E are non-dischargeable.

Debts That Cannot Be Discharged

According to bankruptcy law, there are certain types of debts that you cannot include in your bankruptcy petition. Even if you do include them on your schedule, the trustee will likely either tell you to amend your petition or convert your case to a Chapter 13 bankruptcy.

There are 19 separate categories of nondischargeable debt. Some of these are always nondischargeable while others become nondischargeable if a creditor objects to the discharge.

Below we look at the types of non-dischargeable debts in more detail.

Debts That Are Always Non-Dischargeable

When the bankruptcy trustee reviews your schedules and lists of debts, they will highlight any nondischargeable debts. They will notify your bankruptcy attorney of these debts and give you the opportunity to refile your bankruptcy case without them listed on your schedules.

You may also have the option to convert your Chapter 7 case to a Chapter 13 bankruptcy case. While this may be a good option if you have exempt assets, it may not be a workable solution for you, depending on the amount of debt you owe and your ability to commit to a Chapter 13 payment plan.

The debts that are almost always nondischargeable in a Chapter 7 bankruptcy include the following:

• Alimony and child support

• Certain tax debts (especially tax debts that are less than two years old)

• Student loans (unless you can prove an undue hardship, which is usually denied)

• Debts you owe from a personal injury lawsuit involving DUI

• Criminal restitution

• Spousal maintenance (alimony)

• Debts arising out of fraud or some other crime

• Debts you do not list when you file your bankruptcy petition

You must repay these debts in accordance with state and federal law.

Debts That May Be Non-Dischargeable If a Creditor Objects

While the above debts are almost always nondischargeable, other types of debt may become nondischargeable if the creditor objects to their discharge.

At some point during your bankruptcy proceedings, you must attend something called the 341 Meeting of Creditors. This is where the trustee and your creditors may ask you questions about your finances and the debts you are seeking to have discharged by the court.

During this hearing, a creditor may object to the discharge of their debt. If they do challenge your discharge, they must do so in a separate adversary proceeding.

Objections to discharge are more common with the following types of financial obligations:

• Debts resulting from fraud

• Income tax (depends on the individual’s circumstances)

• Certain debts for luxury goods or services bought 90 days before filing

• Certain cash advances taken within 70 days of filing

• Debts from willful and malicious acts

• Debts from willful and malicious injury to property

• Debts from embezzlement, theft, or breach of fiduciary duty

• Debts from a divorce settlement or court decree where the detriment to the recipient would be greater than the benefit to you

Your bankruptcy lawyer can challenge these objections and will, as long as there are grounds to do so. This is why it’s so important to have a lawyer review your bankruptcy petition before you submit it to the court. They’ll look for any questionable debts and discuss your options.

Car Loans and Other Secured Debts

Typically, the court will not allow you to discharge secured debts, such as your car loan. However, there are times when the trustee and judge agree to discharge a secured debt. This rarely occurs, and you will have to make certain concessions to make it happen.

With a car loan, for example, the court may agree to discharge the balance on your loan, but in exchange you will have to surrender the vehicle through voluntary repossession. Or you may be able to keep your car if the lender allows you to enter a reaffirmation agreement.

Reaffirmation Agreements

Sometimes, a bankruptcy filer wishes to keep a piece of property, such as their car, despite filing for bankruptcy. Perhaps you need your vehicle to get back and forth to work. Or you may want to keep your car for convenience’s sake or sentimental reasons.

If this is the case, you can ask the creditor for a reaffirmation agreement. The terms of a reaffirmation agreement usually include:

• You will remain liable for the debt

• You must pay back some or all of the debt

• You pay the balance on the loan even though the debt qualified for a discharge in bankruptcy

• The creditor will not repossess the property as long as you continue to pay the debt

Reaffirmation must occur before the judge enters the order of discharged debt. If you want to keep your motor vehicle or other property, let your bankruptcy attorney know before you file. This way, they can negotiate a fair payment schedule with the creditor prior to filing for bankruptcy.

When Discharge Can Be Denied or Revoked

There is no such thing as a right to discharge in a Chapter 7 bankruptcy case. Even if the types of debt you included on your schedule would normally qualify for discharge, the judge doesn’t automatically grant it.

There is a chance that the judge (or trustee) will deny your discharge, either entirely or in part.

The court may deny a Chapter 7 discharge for any of the reasons described in Section 727(a) of the Bankruptcy Code, including:

• Failing to provide copies of your tax returns

• Failing to complete a personal financial management class

• Transferring or concealing property and assets with the intent to hinder, delay, or defraud creditors

• Destroying or hiding financial records

• Perjury and other fraudulent acts

• Failing to account for the loss of assets

• Violating a court order

• Failing to maintain or provide sufficient financial records and books

• Inability to provide a satisfactory account of missing assets

These criteria are specified under 11 U.S.C. § 727 and are governed by Fed. R. Bankr. P. 4005. You will have a chance to respond to an objection to discharge. In cases like this, it’s essential that you seek legal advice from a skilled bankruptcy lawyer. The amount you may pay in attorney fees is worth it if it prevents the court from dismissing your bankruptcy case or refusing to discharge a large debt.

Revocation of Discharge

The bankruptcy courts rarely revoke a debtor’s discharge. However, it has the power to do so in limited circumstances. If you learn that the court intends to do this, you should contact your bankruptcy lawyer immediately. You will not have long to respond, and the last thing you want to do is let the court proceed with its revocation without hearing your side of the story.

Some of the reasons why the court may revoke a Chapter 7 discharge include:

• A trustee or creditor requests that the court revoke the debtor’s discharge based on allegations of fraud.

• The debtor obtained the discharge through fraud.

• The debtor failed to disclose assets.

• You committed an act of impropriety as described in Section 727(a)(6) of the Bankruptcy Code.

• You knowingly and fraudulently failed to report the acquisition of property of the bankruptcy estate.

• You fail to surrender certain property to the trustee

• The debtor cannot explain misstatements the trustee discovered in an audit.

• You fail to cooperate with an audit.

• You make a material misstatement or fail to provide documents/information to the trustee in connection with an audit (and cannot provide a reasonable justification for the misstatement)

Typically, a creditor or trustee must file their revocation request within one year of discharge. The court will decide whether such allegations are true and, if so, whether to revoke the discharge.

Exemptions and Property That Can Be Taken Before a Discharge

Bankruptcy is intended to help you find debt relief. Stripping you of all your property would be counterproductive, as you would need to buy a car or other items again. Furthermore, bankruptcy filers often need their motor vehicle to earn a living and need their home to live in.

Generally, property the court considers necessary for modern life may be exempt from creditors. However, if a creditor attempts to repossess it or initiates foreclosure proceedings, you may need to ask the judge’s help to stop them.

Some examples of the property a creditor might try to take back include:

• Motor vehicles or a second vehicle

• A second home or vacation home

• Expensive clothing

• Household furniture

• Jewelry

• Tools of the trade

• Musical instruments (unless you can prove you are a professional musician)

• Cash, bank accounts, stocks, bonds, and other investments

• Pensions

• A portion of the equity in your home

• A portion of earned but unpaid wages

• Public benefits that have accumulated in a bank account

• Damages awarded for personal injury

• Family heirlooms

• Social security or disability benefits

The good news is that much of this property should be protected by state or federal bankruptcy exemptions. If you fear that a creditor is trying to seize any of the above property, let your bankruptcy lawyer know right away. They will review whether any exemptions apply to your case and ensure you claim them in your bankruptcy petition.

Your Rights After Discharge

A Chapter 7 bankruptcy can remain on your credit report for up to ten years, hurting your credit score. During this time, the status of any debts you included in your bankruptcy will change to “Discharged in Bankruptcy.”

If one of your creditors reports your account as anything other than discharged, contact the attorney who handled your bankruptcy. You may have a legal claim against the creditor and the credit reporting agency.

What to Do If a Creditor Tries to Collect a Discharged Debt

A bankruptcy discharge is a permanent statutory injunction prohibiting creditors from taking any action to collect a discharged debt. If a creditor attempts to collect a discharged debt or otherwise violates your discharge order, you can file a motion with the court and ask that it reopen your bankruptcy case to address the matter.

The court can sanction a creditor for violating the discharge injunction. The standard sanction for violating the discharge injunction is civil contempt, which is usually punishable by a fine.

An Experienced Bankruptcy Attorney Can Help You Get a Fresh Start

Filing bankruptcy is rarely easy. However, for some people, it’s the only solution to their financial problems. If you file Chapter 7 bankruptcy, you may walk away without owing any of your prior debts.

If you think Chapter 7 bankruptcy is the best option for you, then you should meet with a skilled bankruptcy lawyer to discuss your case. They’ll explain how bankruptcy works and what to expect during and after the bankruptcy. They’ll also discuss which of your debts are dischargeable in bankruptcy.

Before filing your bankruptcy petition, schedule a consultation with a seasoned bankruptcy lawyer near you.