Law Firm of David Paul Morgan

WHAT IS A DISCHARGE IN

BANKRUPTCY?

A bankruptcy discharge releases the debtor

from personal liability for certain specified

types of debts. In other words, the debtor is no

longer legally required to pay any debts that

are discharged. The discharge is a permanent

order prohibiting the creditors of the debtor

from taking any form of collection action on

discharged debts, including legal action and

communications with the debtor, such as

telephone calls, letters, and personal contacts.

Although a debtor is not personally liable for

discharged debts, a valid lien (i.e., a charge

upon specific property to secure payment of a

debt) that has not been avoided (i.e., made

unenforceable) in the bankruptcy case will

remain after the bankruptcy case. Therefore,

a secured creditor may enforce the lien to

recover the property secured by the lien.

unenforceable) in the bankruptcy case will

remain after the bankruptcy case. Therefore,

a secured creditor may enforce the lien to

recover the property secured by the lien.

upon specific property to secure payment of a

debt) that has not been avoided (i.e., made

unenforceable) in the bankruptcy case will

remain after the bankruptcy case. Therefore,

a secured creditor may enforce the lien to

recover the property secured by the lien.

unenforceable) in the bankruptcy case will

remain after the bankruptcy case. Therefore,

a secured creditor may enforce the lien to

recover the property secured by the lien.

WHEN DOES THE DISCHARGE

OCCUR?

The timing of the discharge varies, depending

on the chapter under which the case is filed. In

a chapter 7 (liquidation) case, for example, the

court usually grants the discharge promptly on

expiration of the time fixed for filing a

complaint objecting to discharge and the time

fixed for filing a motion to dismiss the case

for substantial abuse (60 days following the

first date set for the 341 meeting). Typically,

this occurs about four months after the date

the debtor files the petition with the clerk of

the bankruptcy court. In individual chapter 11

cases, and in cases under chapter 12

(adjustment of debts of a family farmer or

fisherman) and 13 (adjustment of debts of an

individual with regular income), the court

generally grants the discharge as soon as

HOW DOES THE DEBTOR GET A

DISCHARGE?

Unless there is litigation involving objections

to the discharge, the debtor will usually

automatically receive a discharge. The Federal

Rules of Bankruptcy Procedure provide for

the clerk of the bankruptcy court to mail a

copy of the order of discharge to all creditors,

the U.S. trustee, the trustee in the case, and

the trustee’s attorney, if any. The debtor and

the debtor’s attorney also receive copies of the

discharge order. The notice, which is simply

a copy of the final order of discharge, is not

specific as to those debts determined by the

court to be non-dischargeable, i.e., not

covered by the discharge. The notice informs

creditors generally that the debts owed to

them have been discharged and that they

should not attempt any further collection.

They are cautioned in the notice that

continuing collection efforts could subject

them to punishment for contempt. Any

inadvertent failure on the part of the clerk to

send the debtor or any creditor a copy of the

discharge order promptly within the time

required by the rules does not affect the

validity of the order granting the discharge.

covered by the discharge. The notice informs

creditors generally that the debts owed to

them have been discharged and that they

should not attempt any further collection.

They are cautioned in the notice that

continuing collection efforts could subject

them to punishment for contempt. Any

inadvertent failure on the part of the clerk to

send the debtor or any creditor a copy of the

discharge order promptly within the time

required by the rules does not affect the

validity of the order granting the discharge.

ARE ALL OF THE DEBTOR’S DEBTS

DISCHARGED OR ONLY SOME?

Not all debts are discharged. The debts

discharged vary under each chapter of the

Bankruptcy Code. Section 523(a) of the Code

specifically excepts various categories of

debts from the discharge granted to individual

debtors. Therefore, the debtor must still repay

those debts after bankruptcy. Congress has

determined that these types of debts are not

dischargeable for public policy reasons (based

either on the nature of the debt or the fact that

the debts were incurred due to improper

behavior of the debtor, such as the debtor’s

drunken driving).

There are 19 categories of debt excepted from

discharge under chapters 7, 11, and 12. A

more limited list of exceptions applies to

cases under chapter 13.

Generally speaking, the exceptions to

discharge apply automatically if the language

prescribed by section 523(a) applies. The

most common types of nondischargeable

debts are certain types of tax claims, debts not

set forth by the debtor on the lists and

schedules the debtor must file with the court,

debts for spousal or child support or alimony,

debts for willful and malicious injuries to

person or property, debts to governmental

units for fines and penalties, debts for most

government funded or guaranteed educational

loans or benefit overpayments, debts for

personal injury caused by the debtor’s

operation of a motor vehicle while

intoxicated, debts owed to certain taxadvantaged

retirement plans, and debts for

certain condominium or cooperative housing

fees.

The types of debts described in sections

523(a)(2), (4) and(6) (obligations affected by

fraud or maliciousness) are not automatically

excepted from discharge. Creditors must ask

the court to determine that these debts are

excepted from discharge. In the absence of an

affirmative request by the creditor and the

granting of the request by the court, the types

of debts set out in sections 523(a)(2), (4) and

(6) will be discharged.

A slightly broader discharge of debts is

available to a debtor in a chapter 13 case than

in a chapter 7 case. Debts dischargeable in a

chapter 13, but not in chapter 7, include debts

for willful and malicious injury to property,

debts incurred to pay non-dischargeable tax

obligations, and debts arising from property

settlements in divorce or separation

proceedings. Although a chapter 13 debtor

generally receives a discharge only after

completing all payments required by the

court-approved (i.e., “confirmed”) repayment

plan, there are some limited circumstances

under which the debtor may request the court

to grant a “hardship discharge” even though

the debtor has failed to complete plan

payments. Such a discharge is available only

to a debtor whose failure to complete plan

payments is due to circumstances beyond the

debtor’s control. The scope of a chapter 13

“hardship discharge” is similar to that in a

chapter 7 case with regard to the types of

debts that are excepted from the discharge. A

hardship discharge also is available in chapter

12 if the failure to complete plan payments is

due to “circumstances for which the debtor

should not justly be held accountable.”

plan, there are some limited circumstances

under which the debtor may request the court

to grant a “hardship discharge” even though

the debtor has failed to complete plan

payments. Such a discharge is available only

to a debtor whose failure to complete plan

payments is due to circumstances beyond the

debtor’s control. The scope of a chapter 13

“hardship discharge” is similar to that in a

chapter 7 case with regard to the types of

debts that are excepted from the discharge. A

hardship discharge also is available in chapter

12 if the failure to complete plan payments is

due to “circumstances for which the debtor

should not justly be held accountable.”

DOES THE DEBTOR HAVE THE RIGHT

TO A DISCHARGE OR CAN

CREDITORS OBJECT TO THE

DISCHARGE?

In chapter 7 cases, the debtor does not have an

absolute right to a discharge. An objection to

the debtor’s discharge may be filed by a

creditor, by the trustee in the case, or by the

U.S. trustee. Creditors receive a notice shortly

after the case is filed that sets forth much

important information, including the deadline

for objecting to the discharge. To object to the

debtor’s discharge, a creditor must file a

complaint in the bankruptcy court before the

deadline set out in the notice. Filing a

complaint starts a lawsuit referred to in

bankruptcy as an “adversary proceeding.”

The court may deny a chapter 7 discharge for

any of the reasons described in section 727(a)

of the Bankruptcy Code, including failure to

provide requested tax documents; failure to

complete a course on personal financial

management; transfer or concealment of

property with intent to hinder, delay, or

defraud creditors; destruction or concealment

of books or records; perjury and other

fraudulent acts; failure to account for the loss

of assets; violation of a court order or an

earlier discharge in an earlier case

commenced within certain time frames

(discussed below) before the date the petition

was filed. If the issue of the debtor’s right to

a discharge goes to trial, the objecting party

has the burden of proving all the facts

essential to the objection.

In chapter 12 and chapter 13 cases, the debtor

is usually entitled to a discharge upon

completion of all payments under the plan. As

in chapter 7, however, discharge may not

occur in chapter 13 if the debtor fails to

complete a required course on personal

financial management. A debtor is also

ineligible for a discharge in chapter 13 if he or

she received a prior discharge in another case

commenced within time frames discussed the

next paragraph. Unlike chapter 7, creditors do

not have standing to object to the discharge of

a chapter 12 or chapter 13 debtor. Creditors

can object to confirmation of the repayment

plan, but cannot object to the discharge if the

debtor has completed making plan payments.

CAN A DEBTOR RECEIVE A SECOND

DISCHARGE IN A LATER CHAPTER 7

CASE?

The court will deny a discharge in a later

chapter 7 case if the debtor received a

discharge under chapter 7 or chapter 11 in a

case filed within eight years before the second

petition is filed. The court will also deny a

chapter 7 discharge if the debtor previously

received a discharge in a chapter 12 or chapter

13 case filed within six years before the date

of the filing of the second case unless (1) the

debtor paid all “allowed unsecured” claims in

the earlier case in full, or (2) the debtor made

payments under the plan in the earlier case

totaling at least 70 percent of the allowed

unsecured claims and the debtor’s plan was

proposed in good faith and the payments

represented the debtor’s best effort. A debtor

is ineligible for discharge under chapter 13 if

he or she received a prior discharge in a

chapter 7, 11, or 12 case filed four years

before the current case or in a chapter 13 case

filed two years before the current case.

CAN THE DISCHARGE BE REVOKED?

The court may revoke a discharge under

certain circumstances. For example, a trustee,

creditor, or the U.S. trustee may request that

the court revoke the debtor’s discharge in a

chapter 7 case based on allegations that the

debtor: obtained the discharge fraudulently;

failed to disclose the fact that he or she

acquired or became entitled to acquire

property that would constitute property of the

bankruptcy estate; committed one of several

acts of impropriety described in section

727(a)(6) of the Bankruptcy Code; or failed to

explain any misstatements discovered in an

audit of the case or fails to provide documents

or information requested in an audit of the

case. Typically, a request to revoke the

debtor’s discharge must be filed within one

year of the discharge or, in some cases, before

the date that the case is closed. The court will

decide whether such allegations are true and,

if so, whether to revoke the discharge.

In a chapter 11, 12 and 13 cases, if

confirmation of a plan or the discharge is

obtained through fraud, the court can revoke

the order of confirmation or discharge.

MAY THE DEBTOR PAY A

DISCHARGED DEBT AFTER THE

BANKRUPTCY CASE HAS BEEN

CONCLUDED?

A debtor who has received a discharge may

voluntarily repay any discharged debt. A

debtor may repay a discharged debt even

though it can no longer be legally enforced.

Sometimes a debtor agrees to repay a debt

because it is owed to a family member or

because it represents an obligation to an

individual for whom the debtor’s reputation is

important, such as a family doctor.

WHAT CAN THE DEBTOR DO IF A

CREDITOR ATTEMPTS TO COLLECT

A DISCHARGED DEBT AFTER THE

CASE IS CONCLUDED?

If a creditor attempts collection efforts on a

discharged debt, the debtor can file a motion

with the court, reporting the action and asking

that the case be reopened to address the

matter. The bankruptcy court will often do so

to ensure that the discharge is not violated.

The discharge constitutes a permanent

statutory injunction prohibiting creditors from

taking any action, including the filing of a

lawsuit, designed to collect a discharged debt.

A creditor can be sanctioned by the court for

violating the discharge injunction. The normal

sanction for violating the discharge injunction

is civil contempt, which is often punishable by

a fine.

CAN AN EMPLOYER TERMINATE A

DEBTOR’S EMPLOYMENT SOLELY

BECAUSE THE PERSON WAS A

DEBTOR OR FAILED TO PAY A

DISCHARGED DEBT?

The law provides express prohibitions against

discriminatory treatment of debtors by both

governmental units and private employers. A

governmental unit or private employer may

not discriminate against a person solely

because the person was a debtor, was

insolvent before or during the case, or has not

paid a debt that was discharged in the case.

The law prohibits the following forms of

governmental discrimination: terminating an

employee; discriminating with respect to

hiring; or denying, revoking, suspending, or

declining to renew a license, franchise, or

similar privilege. A private employer may not

discriminate with respect to employment if the

discrimination is based solely upon the

bankruptcy filing.