Bankruptcies fall under federal jurisdiction in the United States. There are federal bankruptcy courts in every judicial district across the country. Federal law, the United States Bankruptcy Code, governs the substance of bankruptcy law. The Bankruptcy Code outlines what it means when a bankruptcy is discharged.
Discharging a Bankruptcy
What does it means if a bankruptcy is discharged? In simple terms, when a bankruptcy court discharges a bankruptcy, the debtor will no longer be liable for qualified debts. In other words, discharge in bankruptcy means the debtor will not have to pay certain debts.
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Discharge mainly applies to unsecured debts, which are debts that have no underlying asset. Things like credit card debt, personal loans, overdrafts, medical bills and utility bills are unsecured debts, unlike a mortgage which is secured against your home. Under some circumstances, a secured creditor may continue to enforce a lien against a property securing the debt even after the court discharges the bankruptcy.
Permanent Stop on Collection
A bankruptcy discharge acts as a permanent injunction that bars creditors from pursuing any further collection efforts. In other words, creditors whose debts were discharged in the bankruptcy are not permitted to take any further enforcement action or communicate with the bankruptcy debtor. This means that those creditors cannot send letters or make harassing phone calls. The discharge is permanent.
Non-Dischargeable Debt Considerations
Congress has enacted legislation that has created several categories of debt that are non-dischargeable. That means that there are certain types of debt that a bankruptcy court cannot discharge under any circumstances. The main categories for non-dischargeable debt are federal student loans (in most circumstances), most taxes (federal, state and local), criminal fines, alimony, condo fees, retirement plan debt and child support. You will always be liable to pay these debts.
Non-dischargeable student loans are a special category. These loans can be forgiven or discharged in certain circumstances, typically when the debtor is facing undue hardship.
Discharge is Not a Dismissal
Discharge is different than a dismissal. If a bankruptcy case is dismissed, the bankruptcy court will not order the creditors to forgive any debt – they are just ending that particular collection activity. In addition, if a bankruptcy case is dismissed, rather than discharged, the creditors are free to restart all legal collection efforts.
Timing of Discharge
Timing can vary as to when a bankruptcy court will discharge a bankruptcy. Chapter 7 liquidation bankruptcies typically take about four months from the date the debtor files the bankruptcy petition before the court will discharge the bankruptcy. In Chapter 11, 12 and 13 cases, the court will typically grant the discharge once the debtor completes making payments on the approved payment plan. Those types of bankruptcies can take 3 to 5 years to discharge.
Bankruptcy is not always the best action for debtors and should only be pursued after carefully considering all options. Please consult a qualified attorney licensed to practice in the state in which you reside to find out if bankruptcy is right for you.