Permanent Debt Relief In The Form Of A Bankruptcy Discharge
At the end of a successful bankruptcy case the bankruptcy court issues a bankruptcy discharge order, which erases the filer’s personal liability to pay back the debt. That discharge is generally permanent. Although a bankruptcy discharge can be revoked, it’s rare. It typically happens if it’s later discovered that the filer lied in their bankruptcy petition, didn’t list all of their income or assets, or committed some other type of bankruptcy fraud.
The filer never has to pay back discharged debt. It’s illegal for creditors to try to collect on discharged debt. If they do, the filer can bring legal action against the creditor, which can force them to pay a penalty for violating the discharge order.
The bankruptcy discharge and the automatic stay both stop creditors from taking collection action against you. The difference is that the automatic stay happens automatically after bankruptcy filing and is temporary, while discharge is granted in successful bankruptcy cases and is generally permanent. The filer has to meet certain conditions to receive a bankruptcy discharge. That includes attending the meeting of creditors, filing all necessary bankruptcy paperwork, providing documents the bankruptcy trustee requests, completing credit counseling and financial management courses, and anything else that is required in the filer’s specific circumstances.
Fans Of Nbcs The Office May Remember An Episode In Which Michael Scott Yells To His Office I Declare Bankruptcy Unfortunately Theres A Lot More To Fixing A Heap Of Debt Than Making A Loud Proclamation Filing For Bankruptcy Is A Complex Legal Process That Might Save You Money But It Also Comes With Serious Consequences Youll Want To Consider
The first step in determining whether a bankruptcy is right for you is defining what it is. Here are a couple important terms to know:
- Bankruptcy is a legal means by which someone with a large burden of debt can get out from under it. In a 1934 case , the U.S. Supreme Court defined the purpose of bankruptcy as giving a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. In other words, its an opportunity for a financial do-over.
- If bankruptcy is the end goal, a bankruptcy discharge is a tool used to accomplish it. A bankruptcy discharge is a court order that releases a debtor from personal liability for specific debts. It legally prohibits a lender or creditor from taking any action to collect the debt in question.
Sound too good to be true? In several important ways, it is. For one, the bankruptcy shows up on your credit reports for seven to 10 years, depending on the type of bankruptcy you file, and will almost surely harm your credit scores. It also only applies to certain specific types of debts, so its not a catch-all remedy.
Follow along to learn more about discharged debt and whether a Chapter 7 or Chapter 13 bankruptcy might make sense for you. If in doubt, work with a qualified or bankruptcy lawyer to ensure you make the best decision for your needs.
Do you really need to talk to a credit counselor if youre considering bankruptcy?
Bankruptcy Discharge And Student Loans
You might be able to get federal and private student loan debt discharged if the bankruptcy court approves your request through whats known as an adversary proceeding. In this request, a Chapter 7 or Chapter 13 bankruptcy filer states that student loan debt repayment would cause financial hardship for them and their dependents.
Positive scenarios that might arise from a hardship filing include:
- Your student loan debt is completely discharged, meaning you owe none of the debt.
- Your student loan debt is partially discharged, meaning you must repay some of the debt.
- Your student loan debt is not discharged, but you qualify for better terms, such as a lower interest rate.
In 2021, the American Bar Association, a group for lawyers and law students, urged Congress to change the U.S. Bankruptcy Code to give borrowers the ability to discharge student loans without proving that repayment of the debt would impose an undue hardship on them or their dependents.
The proposed federal Fresh Start Through Bankruptcy Act of 2021 would make federal student loans eligible for discharge in a bankruptcy case 10 years after the first loan payment is due. Furthermore, the act would retain the current undue hardship discharge option for private student loans and for federal student loans that have been due for less than 10 years.
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What Are Some Negative Consequences Of A Bankruptcy Discharge
When you clean your financial slate with a bankruptcy, youll have to deal with some credit-related consequences.
A bankruptcy will remain on your credit reports for up to either seven or 10 years from the date you file, depending on the type of bankruptcy. Since your credit scores are calculated based on the information in your credit reports, a bankruptcy will affect your credit scores as well. This can make it more difficult to buy a home or a car with a loan, or even get a new apartment rental. For more information, check out our article on what happens to your credit when you file for bankruptcy.
A discharged Chapter 7 bankruptcy and a discharged Chapter 13 bankruptcy have the same impact on your credit scores, though its possible a lender might look more favorably on one or the other.
What If You Get Into Debt Again
Depending on the timing between discharges, you may be able to file for bankruptcy again. Here is the timeline:
- From Chapter 7 to another Chapter 7: Eight Years
- From Chapter 13 to another Chapter 13: Two years
- From Chapter 7 to Chapter 13: Four Years
- From Chapter 13 to Chapter 7: Six Years
If you don’t qualify for another bankruptcy or you simply don’t want to file again, you also have other options to becoming debt-free.
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An Automatic Stay Will Stop Debt Collection
Filing for bankruptcy will trigger the automatic stay. The automatic stay will ensure that creditors will not try to collect from you while your case is pending. What this means is they can’t contact you to collect on debts like credit card debts and other types of unsecured debts. The automatic stay will also stop the garnishment of your wages.
Discharge And Debt Types
Itâs helpful to review some terms before we get started:
A bankruptcy discharge is a court order that wipes out all eligible debts.
Dischargeable debt is debt thatâs eligible to be wiped out if your bankruptcy case is successful.
Non-dischargeable debt is debt that wonât be wiped out even if you get a discharge order. This is debt youâll still have to pay after your bankruptcy case.
Unsecured debt is debt thatâs not backed by property. You may hear this described as debt thatâs not âsecured by collateral.â Secured debt is debt thatâs backed by property. In other words, itâs debt thatâs secured by collateral.
Itâs important to know whether your debt is dischargeable or non-dischargeable so you can evaluate how much bankruptcy will help to reduce or eliminate your debt load. Some filers have some debt thatâs dischargeable and some thatâs not. Others have only dischargeable debt, which means they can start with a clean financial slate after bankruptcy.
Now that you have some of the lingo down, letâs get into specifics.
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Discharge And Your Assets
Any assets that the Official Receiver or the trustee held or claimed during your bankruptcy remain under the control of the Official Receiver or the trustee.
They are not returned to you on discharge. It may be some time after your discharge before all your assets are dealt with. If your home has not been dealt with in a certain period, usually three years from the date of the bankruptcy order, your interest in it may be returned to you.
Find out more by reading our guidance publication, What will happen to your home?
If you are making payments under an income payments order or agreement you must continue to make these payments even after the date of your discharge.
Still Have Questions Speak To A Bankruptcy Attorney
Bankruptcy gives you a fresh start. But you need to have extensive knowledge of the bankruptcy laws and procedures if you are thinking of filing your bankruptcy petition without an attorney. As bankruptcy has a range of long-lasting consequences, it may be best to speak to a bankruptcy lawyer to guide you based on your particular situation.
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How Chapter 7 Works
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. In addition to the petition, the debtor must also file with the court: schedules of assets and liabilities a schedule of current income and expenditures a statement of financial affairs and a schedule of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007. Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case . 11 U.S.C. § 521. Individual debtors with primarily consumer debts have additional document filing requirements. They must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling evidence of payment from employers, if any, received 60 days before filing a statement of monthly net income and any anticipated increase in income or expenses after filing and a record of any interest the debtor has in federal or state qualified education or tuition accounts. Id. A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.
Planning For A Better Financial Future
Set up a savings plan. In other words, pay yourself first. Even if it is only a few dollars per pay period, try to put aside a little for emergencies as soon as you are able. For many people who have been out of work or are otherwise financially devastated, it can be hard to imagine being able to save again. Still, a small amount can add up over the long run.
Ideally, you should eventually save six months of living expenses. However, having even a modest amount set aside in savings can help when the unexpected comes up. Start small and aim for a month’s salary in savings, then work up from there. Arranging for this money to be transferred directly from your paycheck to your savings account, so you never see it, will make it easier to save.
Quick Note: Never rely on credit as an emergency fund: If you have a savings plan, you can avoid one of the most destructive financial habits: using credit as an emergency fund. It is better to take a little money out of savings to replace the flat tire or the washing machine that died suddenly than taking on new debt.
Contribute to a retirement plan. If you already have a 401k or other retirement plan, try to contribute as much to it as possible. At the very least, kick in as much as your employer matches. Of course, if you can max out your contributions, so much the better. However, as with general savings, even small contributions add up over time.
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How To Get Proof You’ve Been Discharged
Your discharge from bankruptcy will happen automatically, so you won’t necessarily get proof sent to you.
Email the Insolvency Service to get a free confirmation letter. You should only ask for this after the discharge date.
If you ask for a confirmation letter, you must include your:
- National Insurance number
- court reference number
If youre applying for a mortgage, youll need a Certificate of Discharge. If you originally applied for bankruptcy through a court then youll need to ask them for a certificate. This costs £70 and £10 for extra copies.
If you originally applied for bankruptcy online, email the Insolvency Service for a certificate. Theres no fee for a Certificate of Discharge if you applied online.
What Does Bankruptcy Discharged Mean: Bankruptcy Law Can Resolve Tax Debts
As well as the usual unsecured debts mentioned above, if you owe Canada Revenue Agency money because you were not able to pay your whole personal income tax obligation when you filed your taxes, then a payment arrangement makes sense.
Collections officers from the CRA contact taxpayers regarding outstanding income tax debt arising from their tax filings and notices of assessment. They attempt to collect from delinquent taxpayers. When you say that you cannot pay the full amount at that time, they will offer you the option of a payment arrangement. The interviewer will ask you about your financial situation and may ask you to submit documents to support your income and expense claims.
They recommend a settlement plan after evaluating the information. Only if all attempts at collection have failed will legal action be taken. You must send the CRA postdated cheques to cover the agreed-upon monthly payment to participate in such a plan. Additional payments can be made if you have money to spare. The interest clock does not stop with a CRA payment plan. Be certain that all your cheques clear the bank as well. The entire payment plan can be cancelled if only one is returned NSF.
Several other things to keep in mind are:
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What Debts Cant Be Discharged In Chapter 7
Some debts canât be discharged in Chapter 7, including:
Debts related to misconduct: If a debt results from fraud, dishonesty, or malice, it may be non-dischargeable. For instance, debt that was incurred from an account that was opened fraudulently. Also, debts related to causing intentional personal injury to another person or their property â including injuring or killing someone while driving under the influence â generally arenât dischargeable.
Secured debts that you reaffirm: If you have debt thatâs secured by collateral, such as a car loan, your lender may ask you to sign a reaffirmation agreement. If you reaffirm a debt, it canât be discharged.
Non-Dischargeable Unsecured Debts
There are some types of unsecured debts that the Bankruptcy Code specifically says canât be discharged in Chapter 7 bankruptcy. Some of these include:
Car loans and mortgages are the two most common types of secured debt in bankruptcy cases. When you take out secured debt like a car or home loan, the lender has a âsecurity interestâ in the collateral. This gives them the right to repossess the collateral, sell it, and keep the funds to pay the debt.
Chapter 13 Bankruptcy Discharge Timeline
In a Chapter 13 bankruptcy case, debts are only discharged after all plan payments have been made. That means that unless a crisis occurs and a judge grants a hardship discharge, you wonât receive your bankruptcy discharge for at least three years after filing for Chapter 13 bankruptcy.
Donât worry, though. In a Chapter 13 case, the automatic stay protects you for the duration of your payment plan. So even though you wonât receive a discharge for 3-5 years , creditors canât hound you for debt payments while your case is active.
As in a Chapter 7 case, you must complete the required debtor education course to be eligible for discharge.
Why Would A Bankruptcy Trustee Request A Case Be Dismissed
A bankruptcy trustee assigned to a Chapter 7 case usually requests the dismissal of a case when the filer doesnât attend their mandatory meeting of creditors. However, other common reasons a Chapter 7 case may be dismissed by a trustee include:
A filer not properly completing and submitting required bankruptcy forms
Not turning over requested documentation
Not complying with court orders or other mandatory directions provided by the bankruptcy judge or the trustee
A Chapter 13 trustee may dismiss a case for any of the above reasons. But they may also dismiss a Chapter 13 case if a filer fails to create and submit a repayment plan or fails to make their scheduled plan payments. They can also request dismissal if the filer fails to meet other plan obligations, such as selling real estate. Because there are so many more opportunities for a Chapter 13 bankruptcy filer to misstep over a 3â5 year repayment period, dismissal requests by trustees are far more common in Chapter 13 than in Chapter 7 bankruptcy cases.
Your House And Other Real Property After Bankruptcy
Here are answers to some common questions about homes and mortgage loans after bankruptcy:
What should I do if I want to keep my home after bankruptcy? Make timely payments if keeping your house. If you did not reaffirm your home mortgage loans in Chapter 7 but are current and plan to keep your property, just continue to make your house payments on time. The bank still has a lien on your home and can foreclose if you fall behind on the payments. Note, as mentioned above, if you did not reaffirm the debt, your payments will not be reported to the credit bureau.
Can I walk away from my home after my Chapter 7 bankruptcy? If you did not reaffirm your mortgage loan in Chapter 7, you have more options than if you reaffirmed the loan. If you do not reaffirm your mortgage loan and decide later that you no longer wish to keep your home, you can simply stop making the payments. Eventually, the property will go into foreclosure, but the bank will not be able to obtain a deficiency judgment against you.
Can I walk away from my home after my Chapter 13 bankruptcy? It depends. Chapter 13 does not discharge your secured loans in most cases unless you surrender the property in your Chapter 13 plan. If you surrendered the property in your Chapter 13 plan, then you can treat it the same as if you had discharged the debt in Chapter 7.
Quick Note: In most instances, modifying a loan that was not reaffirmed will not cause the payments to show on your credit report.
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