Discharge is the elimination of liability for a debt. Bankruptcy prioritizes debts and manages the debtor’s assets in such a way that it can pay creditors in an orderly fashion. Once those assets are expended, any debt not yet paid is discharged. In the event of discharge, the debtor is not liable for discharged obligations and creditors are forbidden to pursue payment from the debtor. However, discharge is not automatic and some debts are not dischargeable at all. Moreover, a debtor guilty of misconduct during the course of the bankruptcy proceeding will be denied discharge.
Discharge applies only to the debtor involved in the bankruptcy. When more than one person is liable for the obligation, the creditor may pursue collection from the others. When the debt was secured with a piece of property, the creditor may still foreclose on the property. Occasionally, a debtor will agree to pay the debt despite the discharge, which is called reaffirmation. The debtor can then keep property which the creditor would otherwise be able to take.
Chapter 7 is the most common form of bankruptcy. Individuals and businesses may file for Chapter 7 bankruptcy, but the discharge of debt under Chapter 7 applies only to individuals, not businesses. The following are the nondischargeable debts in Chapter 7.
- certain taxes and fines;
- debts arising out of fraudulent acts on the part of the debtor;
- debts not mentioned by the debtor;
- alimony, maintenance and support payments;
- debts arising from a willful and malicious injury;
- educational loans;
- debts owed as a result of driving while intoxicated;
- debts that were not discharged in prior bankruptcy proceedings; and
- certain debts arising from obligations to banks and similar institutions.
- In order to encourage debtors to make efforts to repay some debt, Congress has allowed a greater number of debts to be discharged under those chapters that require the debtor to set up a payment plan to repay a certain amount of the debt.
The rest of the debts are discharged except those to which the debtor obligated himself after he was declared bankrupt by the bankruptcy court.
Chapter 13 is available only to individuals. Under chapter 13, the debtor creates a three to five year plan for repayment of all or a portion of his or her debt. When the debtor completes the plan successfully, the rules allow discharge of a greater number of debts. Non dischargeable debts in Chapter 13 are alimony, maintenance and support obligations, educational loans, driving while intoxicated obligations, payments imposed on the debtor as a result of a criminal conviction, and certain long term debts. When a debtor can not successfully complete a chapter 13 plan, he or she may choose to convert the case to a Chapter 7 bankruptcy or to request a hardship discharge. A hardship discharge will only be granted by the court under certain limited circumstances and will discharge no more debts than Chapter 7 bankruptcy would.
Under Chapter 11, discharge is granted when a plan for repayment is confirmed. When the debtor is a business entity, all debts are discharged and the only obligations the debtor has are those outlined in the plan. The individual filing under Chapter 11 must pay those debts outlined in the payment plan in addition to any debts listed as non-dischargeable under Chapter 7.
Chapter 12 is available to both individuals and certain businesses. Discharge under Chapter 12 is usually granted upon completion of a plan. A hardship discharge is also available under this chapter. Remaining debt is discharged except for non dischargeable debts under Chapter 7 and any long-term debts that extend beyond the completion of the plan.