What Is a Bankruptcy Discharge?

Definition and Examples of a Bankruptcy Discharge

What to know about bankruptcy discharge of debt. A bankruptcy discharge is a court order that relieves you of your obligation to pay a debt following a bankruptcy hearing case While collectors are prohibited from taking collection action on a discharged debt, they can still repossess and sell any property attached to a loan Credit card debt, medical bills, and personal loans are a few types of debt with a good chance of being discharged Child support, fines resulting from criminal activity, and student loans are debts that can’t be discharged under Chapter 7 bankruptcy

Julie Bang © The Balance 2020

A bankruptcy discharge is a court order issued at the end of a Chapter 7 or Chapter 13 bankruptcy proceeding. The order relieves the debtor from any obligation to repay the debts that have been discharged.

Creditors are then prohibited from taking any further actions to collect on these debts. They can't call, send letters, or sue over discharged debts. They can still enforce any liens that are attached to secured debts, however. They can repossess and sell property that acts as collateral for their loans, even after the associated debt has been discharged.

What Is a Bankruptcy Discharge?

A discharged debt literally goes away. It's no longer collectible. The creditor must write it off. Debts that are likely to be discharged in a bankruptcy proceeding include credit card debts, medical bills, lawsuit judgments, personal loans, obligations under a lease or other contract, and other unsecured debts. 

That might seem too good to be true, and there are indeed some drawbacks. Filing for bankruptcy and receiving a discharge will seriously impact your credit, and you must establish to the court's satisfaction that the discharge is financially necessary. You can't simply ask the bankruptcy court to discharge your debts because you don't want to pay them.

You must complete all the requirements for your bankruptcy case to receive a discharge. The court can deny your discharge if you don’t take a required financial management course.

How a Bankruptcy Discharge Works

A copy of the discharge order will be mailed to all your creditors, as well as to the U.S. Bankruptcy Trustee, the trustee who is personally handling your bankruptcy case, and the trustee’s attorney. This order includes notice that creditors should take no further actions to collect on the debts or they'll face punishment for contempt.

Keep a copy of your order of discharge along with all your other bankruptcy paperwork. You can use a copy of these papers to correct credit report issues or to deal with creditors who try to collect from you after the bankruptcy discharge.

You can file a motion with the bankruptcy court to have your case reopened if any creditor tries to collect a discharged debt from you. The creditor can be fined if the court determines that it violated the discharge injunction. You can try simply sending a copy of your order of discharge to stop any collection activity, then talk to a bankruptcy attorney about taking legal action if that doesn't work.

Types of Bankruptcy Discharges

Individual debtors can file for Chapter 7 or Chapter 13 bankruptcy protection. The trustee will liquidate your nonexempt assets and divide the proceeds among your creditors in a Chapter 7 bankruptcy. Any debt that remains will be discharged or erased.

You'll enter into a payment plan over three to five years that repays all or most of your debts if you file for Chapter 13 protection. Any debt that remains at the end of your repayment plan will be discharged.

A Chapter 13 bankruptcy allows some debts to be discharged that can't be discharged in Chapter 7 proceedings. This includes marital debts created in a divorce agreement, although not spousal support or alimony, as well as court fees, certain tax-related debts, condo and homeowners' association fees, debts for retirement loans, and debts that couldn't be discharged in a previous bankruptcy. 

Limitations of Chapter 7 Discharges

Section 523(a) of the Bankruptcy Code describes the types of debt that can't be discharged in Chapter 7 proceedings, including:

  • Domestic obligations such child support, alimony, and debts owed under a marriage settlement agreement
  • Certain fines, penalties, and restitution resulting from criminal activities
  • Certain taxes, including fraudulent income taxes, property taxes that came due within the previous year, and business taxes
  • Court costs
  • Debts associated with a DUI violation
  • Condo or other homeowners’ association fees that were imposed after you filed bankruptcy
  • Retirement plan loans
  • Debts that weren't discharged in a previous bankruptcy
  • Debts you failed to list on your bankruptcy petition 

Limitations of Chapter 13 Discharges

Some debts can't be discharged under Chapter 13 bankruptcy, including:

  • Child support and alimony
  • Certain fines, penalties, and restitution resulting from criminal activities
  • Certain taxes, including fraudulent income taxes, property taxes that became due within the previous three years, and business taxes
  • Debts you didn’t list on your bankruptcy petition
  • Debts incurred due to personal injury or death caused by drunk driving
  • Debts arising from fraud or recent luxury purchases 

It's extremely difficult—if not impossible—to discharge student loans in either chapter of bankruptcy.

Creditors can ask that certain debts not be discharged, even if discharge isn't prohibited by statute. These include debts incurred through fraud, any luxuries you charged in the months preceding your bankruptcy, and debts arising from willful and malicious acts like arson, kidnapping, vandalism, libel, or slander. 

Disadvantages of a Bankruptcy Discharge

Your bankruptcy protection doesn't extend to joint account holders or cosigners on any of your debt obligations. Your personal liability for the debt is removed when you receive your bankruptcy discharge, but your cosigner remains on the hook for the entire balance of the debt. Creditors can still collect from—or even sue—cosigners and joint account holders for discharged debts.

You can voluntarily make payments on a debt to ensure that it's paid in full.

Your bankruptcy discharge will additional appear on your credit report and affect your credit score for seven years after you file for Chapter 13 protection, and for 10 years from the date you file for Chapter 7 bankruptcy. 

Accounts associated with your bankruptcy might be deleted from your credit report if the date of delinquency preceded your bankruptcy filing.

How Long Does It Take to Get a Bankruptcy Discharge?

Discharge for a Chapter 7 bankruptcy usually occurs about four months after the date you file your bankruptcy petition. The discharge occurs after all the payments under the repayment plan have been made in a Chapter 13 bankruptcy, typically three to five years.

Key Takeaways

  • A bankruptcy discharge effectively erases certain debts.
  • Creditors can no longer attempt to collect on discharged debts, although they can still seize property that’s been pledged as collateral for those debts.
  • Chapter 13 bankruptcy allows for the discharge of a few more types of debts than Chapter 7 does.
  • A bankruptcy discharge remains on a debtor’s credit report for seven to 10 years.