Basics of discharge in bankruptcy, P.1

One of the potentially confusing, and yet the most interesting, things about the bankruptcy process is how discharge works. While it would take many posts to fully describe the process and the specific federal rules regarding discharge, we'll say a few words about the matter in this and the next post.

Discharge refers to the permanent order, issued by a bankruptcy court, which prohibits debtors from collecting on any debts deemed discharged. Neither may creditors of discharged debt take any legal action or make any contact with the debtor concerning that debt. In other words, creditors of discharged debt are no longer creditors of that debt.

The first thing to keep in mind is that discharge of debt is not an absolute right. Creditors do have the right to object to discharge within a certain frame of time set up by the court. In both chapter 7 and 13 cases, the court may also deny discharge on a number of grounds, including failure to take an instruction course concerning financial management.

In chapter 13 bankruptcy, debtors are usually entitled to discharge after completing their repayment plan. In these cases, discharge is typically more automatic, unless litigation arises over objections to the discharge. In chapter 7, there are a number of other possible grounds for denying discharge, including failure to provide requested tax documents, and perjury or other fraudulent acts.

In a chapter 7 case, the court typically issues the discharge order right after the allotted time for objecting to discharge and/or dismissing the case for substantial abuse expires. This is usually around four months after the debtor has filed for bankruptcy.

In chapter 13 cases, discharge order is usually issued soon after the debtor completes his or her payments under the repayment plan, which is typically around four years after filing, unless the court denies it for another reason.

One of the most important things to realize is that not all types of debts can be discharged. Which types can be discharged depend on the chapter under which the debtor files. In our next post, we keep looking at this topic.

Source: Online: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/DischargeInBankruptcy.aspx; United States Courts website; gives an overview of discharge in bankruptcy.