Discharge of Debts -

    Discharge of Debts is one of the most common reasons and a big benefit to the debtor when filing bankruptcy. A bankruptcy discharge"wipes out" or erases a debtor's personal liability for a great number of debts. These include credit cards, medical bills, deficiency amounts owed on cars, boats, or other items, negligence claims, business bills, unpaid rent, some older taxes, personal loans, "sold-out" junior liens, and other debts. The discharge means that the creditor can never collect or attempt to collect the debt from the debtor ever again, amounting to a permanent injunction against collection.

Limitations on Discharge

     Before filing the bankruptcy case, though, the attorney and debtor should thoroughly review the situation to make sure what debts will likely be wiped out. This is because the discharge is limited in scope.

Limits by Chapter

     Limits by Chapter: only individual debtors (no corporations or partnerships) can receive a discharge in Chapter 7. In Chapter 13, only individuals can file, and they will receive a discharge. In Chapter 11, individuals, as well as corporations and partnerships, are eligible to receive a discharge.

Limits on Type of Debt

     Some debts cannot be discharged, including, domestic support obligations, obligations under marital settlement decrees, debts based on fraud, misrepresentation, breach of fiduciary duty, embezzlement, or theft, debts where debtor caused willful or malicious injury to another person or that person's property, recent taxes, educational loans, drunk driving damages, and criminal fines and restitution awards. Thus, while the debtor may receive a discharge, it may not cover all of his debts, including those listed above, if they are deemed to be non-dischargeable.

Limited to "Poor but Honest Debtor"

     Discharge Limited to "Poor but Honest Debtor": The general rule is that an individual debtor will receive a discharge. However, there are 12 exceptions to that rule, set forth in Bankruptcy Code Section 727(a). These are generally situations where the debtor has done something wrong which impacts his creditors as a whole, including: transferring property within one year prior to the bankruptcy case with the intent to hinder, delay or defraud creditors; destroying concealing, falsifying, or failing to maintain, records from which the debtor's financial condition can be determined; refusing to comply with bankruptcy court orders; or lying on his bankruptcy papers. The thinking is that only the poor but honest debtor is entitled to the relief provided by a discharge. The bankruptcy court is not a haven for scoundrels trying to dodge their debts.

Limited Effect on Liens

While the discharge wipes out the debtor's personal liability for the underlying debt, it does not eliminate a lien that covers property, except in certain circumstances. Generally, once the bankruptcy case is over, the lien "rides through", and the creditor is free to enforce the lien after the bankruptcy case. This includes claims by car creditors, mortgage companies, and other secured creditors.

Written by Henry Rendler