Bankruptcy Discharge

One of the primary goals of any Bankruptcy is to "discharge" your unsecured debt.  A discharge wipes away your legal liability on the debt and puts an end to creditor harassment, collection activity, lawsuits, and judgments. 

CLASSIFICATION OF YOUR DEBT

Before filing for Bankruptcy, it is important to understand what types of debt you have and which debts are dischargeable under the Bankruptcy laws.  The Bankruptcy Code generally classifies debt into three major categories: (1) secured; (2) priority; and (3) unsecured. 

In general, secured debts (such as your mortgage or vehicle loan) must be paid, or the property must be returned.  These debts are "secured" by the real or personal property.   

Congress has identified debts in the Bankruptcy Code that it considers "priority debts" deserving of special treatment, including child support obligations and IRS debt. Section 507 sets forth categories of unsecured claims which Congress has, for public policy reasons, given priority of distribution over other unsecured claims.  "Priority" refers to the order in which unsecured claims in a Bankruptcy case are paid from the money available in the Bankruptcy estate.  The higher the priority, the sooner the claim is paid from money in the estate.  When the money runs out, the remaining lower priority claims are paid nothing from the Bankruptcy estate. Priority debts are not dischargeable through a Bankruptcy.

Unsecured debts include credit cards, hospital bills, utility bills, and unsecured personal loans.  These debts are completely discharged, or eliminated, in a Chapter 7 case and are paid a percentage in a Chapter 13 case .  Most of my clients file for Bankruptcy to eliminate or significantly reduce these overwhelming debts.   

NON-DISCHARGEABLE DEBT

The Bankruptcy laws are designed to give the honest Debtor a fresh start, but not a head start.  Therefore, Congress has identified certain debts that cannot be discharged in a Bankruptcy for any reason.  Many debts that would ordinarily qualify for discharge may be determined as non-dischargeable if a Debtor has committed a crime or fraud in acquiring the debt.           

The following are generally non-dischargeable debts:  

• Back child support or alimony obligations, and debts considered in the nature of support;
• Student loans, unless repayment would cause you undue hardship;
• Criminal fines or restitution;
• Debts listed in a prior Bankruptcy where Debtor was denied a discharge;
• Recent income taxes less than three years past due; and
• Auto accident claims involving intoxication.

The following situations may also make a debt non-dischargeable: 

• Debts incurred on the basis of fraud;
• Debts from willful or malicious injury to another or another's property;
• Recent purchases with credit cards;
• Debts from larceny (theft), breach of trust or embezzlement; and
• Most federal, state and local taxes and any money borrowed on a credit card to pay those taxes.

There are exceptions to these rules and each situation has its own rules and challenges.  The Law Office of Nicholas R. Westbrook can help. I can review your situation and determine which debts can be discharged through Bankruptcy.

THE DISCHARGE ORDER

At the end of a Bankruptcy case, the Court signs a formal Order of Discharge.  The Bankruptcy Judge issues this Order, which operates as a permanent injunction against any collection action against you personally. 

The Discharge Order is commonly misunderstood as "erasing your debts," but that is not technically correct.  The debt still exists, but it is not legally enforceable against you personally.  Creditors cannot take any collection action to force or coerce you into paying a discharged debt, including: legal actions (lawsuits, garnishments, etc.); or personal contact.  In fact, any violation of the Bankruptcy injunction can result in a contempt of Court and sanctions against the creditor.

Despite the Discharge Order and injunction, you are always permitted to repay a discharged debt even though it can no longer be legally enforced against you.  There is no prohibition against repayment of a debt, and commencement of voluntary payments does not affect the enforceability of the discharge injunction.  In other words, you can make voluntary payments without fear of waiving your discharge or creating an enforceable debt.  Many of our clients choose to pay back relatives, doctors, and accountants due to the relationship with that person.

While a discharged creditor cannot collect from the Debtor personally, a secured creditor may still execute against property when the creditor has a valid lien that was not made unenforceable by the Bankruptcy Court.  In other words, a secured debt that is not paid for or otherwise avoided may be repossessed by the creditor after the case.  It is important to stay current on these secured debts during and after the Bankruptcy to avoid any problems. 

A creditor can collect from any co-Debtor who has not also filed Bankruptcy.  For instance, if your father co-signed a personal loan with you, your personal obligation to pay the debt is discharged, but your father is still 100% obligated to pay the loan. 

There is no absolute right to a discharge.  The Bankruptcy Court may deny the Debtor a Bankruptcy discharge if the Debtor has failed to provide requested documents; failed to complete a course on personal financial management; transferred or concealed property; destroyed or concealed records; committed perjury or other fraudulent acts during the case; failed to account for the loss of assets; or violated a Bankruptcy Court Order.   

THE AFFECTS OF A DISCHARGE ON YOUR CREDIT REPORT

The Fair Credit Reporting Act ("FCRA") directs credit reporting agencies to exclude Bankruptcy case information from all consumer reports ten years after "the date of entry of the order for relief."  The FCRA does not distinguish between Chapter 7 or Chapter 13.  The ten -year period is measured from the Bankruptcy filing date, not the discharge date.  Moreover, information about your Bankruptcy must be removed from your credit report not later than ten years after the date you filed the case.  If you file on January 1, 2010, the Bankruptcy must be removed before January 1, 2020. 

You may be asking yourself, "Won't Bankruptcy ruin my credit score?"  The answer depends on your unique circumstances.  Every case is different.  As a general rule, the Bankruptcy filing will have an immediate adverse affect on the score, although in some cases there is no score change, and in a few cases the score actually improves.  The good news is this: Bankruptcy immediately stops any adverse negative reporting and allows your credit to improve as soon as you file.

LEARN MORE ABOUT THE BANKRUPTCY DISCHARGE TODAY

Your debts may or may not qualify for a discharge.  In some cases, it is better to work out a payment plan with your creditors.  In other situations, a Chapter 7 or  Chapter 13 Bankruptcy can provide the best relief for your financial problems.  To schedule a free consultation, please contact the Law Office of Nicholas R. Westbrook today at (713) 893-6204.  I can meet with you at one of our convenient locations to discuss your debts and determine whether consumer Bankruptcy is the right solution for you and your family.  You may also contact my office through  Email or the Free Case Evaluation.  The road to financial freedom starts here.