What is a Discharge?

Most people think that the discharge is the elimination of debts.  Most attorneys advertise this way and I myself, in order to communicate with my clients, will use similar terminology or phrases.   However, in truth, the bankruptcy discharge does not eliminate debts.   It eliminates the obligation to repay the debt or, to be even more accurate, it legally prevents (enjoins) the creditor from taking any action to collect on the debt.

11 U.S.C. §524 imposes a permanent federal injunction against the collection of any debt that is discharged in bankruptcy.   That’s pretty powerful stuff.

The distinction of a debt still existing, but not being enforceable, is not that significant in most cases, but it has ramifications for the creditor’s taxes, and there are other reasons for the legal nuance.

Not All Debts Are Dischargeable

Of course, not all debts are dischargeable.    Here are a few of the most common debts not dischargeable in bankruptcy.  These are all set forth in section 523 of the Bankruptcy Code:

1. domestic support obligations (all in Chapter 7 and 11; most in Chapter 13)
2. certain taxes (see more on tax dischargeability)
3. debts incurred by fraud
4.  student loans
5. criminal restitution
6. fines owed to a governmental unit.

Some of the above debts are only non-dischargeable if the creditor files an objection to discharge within specific time frames during the bankruptcy case (such as debts incurred by fraud).   Others, such as student loans, are not discharged unless the DEBTOR brings an action determining them TO be discharged.  Others still, such as child support or alimony, are simply not dischargeable at all.    Tricky, huh?  That’s why God invented bankruptcy attorneys.

Ultimately, if you receive a discharge of a debt, you no longer have to worry about repaying that obligation. Discuss with your attorney whether your debts were discharged.

Discharge not Dismissal

And just to get rid of a pet peeve of mine:  a Discharge is NOT the same thing as a dismissal.  People are always confusing these terms.  In bankruptcy, dismissal means dismissal of the bankruptcy case.   If your case is dismissed, you did NOT get a discharge of debts.

This has been the letter “D” of the bankruptcy alphabet.

This article is part of my bankruptcy alphabet series

To see others writing about the letter D:

D is for Debtor by Jay Fleischman

D is for Discharge by Cathy Moran

Cate Eranthe claims D Is For Disclose

Ryan Caldwell alleges D is for Deconsolidate

Stuart Ing feels D is for Discharge

Kim Coleman believes D is for Documents

Jenna Cho thinks D is for Do’s and Don’ts

Mitchell Goldstein Debt Relief Agency

Image Courtesy of Eddi vanW

Once you get to the promised land in a bankruptcy case–the date your discharge is granted–there is frequently confusion among many as to which of their debts were in fact discharged.   The confusion stems from expectations that there is some official specific ruling as to each debt.   That would be nice, but it’s not the way it works.

The Discharge Notice

When the discharge is entered in a bankruptcy case (for purposes of this article, I am referring to Chapter 7 or Chapter 13 cases; Chapter 11 is somewhat different) the only document that is sent out by the court is a 2-page document that generically states that “the debtor is granted a discharge”.  The second page lists, again generically, which types of debts are usually discharged, and which are not, but does not specify which debts in this case are discharged.

Figuring Out Which Debts Are Discharged

The reason it does not state which debts are discharged is that it is simply impossible.  The bankruptcy code provides numerous exceptions to which debts are discharged.   These exceptions are codified in section 523 of the Bankruptcy Code.¹   Some of these exceptions, such as debts incurred through fraud require the creditor to actively object  within a very specific time frame,  and prevail at trial, in order for the debts to not be discharged.  But many others are automatically not discharged if certain (and in many cases very complicated) conditions are met, and those conditions frequently have many exceptions of their own.  A good example of this is tax obligations.   For a quick look at how income tax dischargeability is determined, click here.

A lot of the criteria for determining whether a debt is discharged is subject to argument and can only be decided by a Judge if brought in front of the judge by one of the parties specifically.  Without that, the best the court can do is issue a general discharge that applies to all those debts which do not have a specific exception from discharge in the bankruptcy code.

Ask Your Attorney!

The bottom line is that most debts, such as credit card, medical, repossession and foreclosure deficiencies,  are in fact discharged.   But you need an attorney to really analyze your facts, preferably before you filed your case,  to let you know which debts might not have been discharged (yet another reason to have a bankruptcy attorney for your case–see more).  Ultimately, if there is a dispute, it will need to be decided by a Judge at trial.

¹ To further complicate matters, each bankruptcy chapter (7, 13, 11) incorporates various parts of section 523 differently, so a debt that is discharged in a Chapter 13 case, for example, may not be discharged in a Chapter 7 or 11, etc. )

Image courtesy of  kangotraveler

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A while back I wrote an article about the importance of keeping records and receipts, as they are necessary in a bankruptcy case (see http://bklaw.com/bankruptcy-blog/2008/11/receipts-and-documentation/). This requirement was recently revisited by the 9th Circuit Court of Appeals in In re Caneva, 550 F.3d 206 (9th Cir. 2008). In that case, the court held that a debtor filing bankruptcy would be denied his discharge because he failed to maintain or preserve adequate books and records from which the Trustee in bankruptcy (and creditors) could assess the debtor’s financial condition.

This is one of the prerequisites to obtaining a discharge in a Chapter 7 case. 11 U.S.C. 727(a)(3) states that one of the bases for denial of a discharge in a Chapter 7 case is where the debtor “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all the circumstances of the case.”

The court in Caneva opined that this is particularly true where the debtor is self-employed or operating a business, but it is required in all cases.
Caneva

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