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The Bankruptcy Discharge

The Holy Grail of Bankruptcy Law
The guaranteed, fastest, least expensive, and least stressful way to wipe-out debt and increase credit score. Boom!

What Is a Bankruptcy Discharge?

The Bankruptcy Discharge Is a Federal Court Order That Eliminates Debts

A quick overview of the discharge

The discharge truly is the Holy Grail of bankruptcy law.

Why? Because this is the thing that eliminates your debts, which for most individuals is the ultimate goal for filing under the Bankruptcy Code.

More specifically, the discharge is a court order entered by the bankruptcy judge.

This court order, also called the “discharge order” has two effects:

  1. It cancels your “personal liability” on your debts.
  2. It places an injunction on your creditors’ collections actions.

The end result is this:

  • You are no longer legally liable for the discharged debts.
  • Your creditors cannot legally attempt to collect the discharged debts — forever.

I like to think of the discharge as a device that voids the contracts you signed with your creditors.

Each chapter has its own discharge provisions

As an individual, you can obtain a discharge under both chapter 7 and chapter 13.

However, the chapter 13 discharge is a bit more powerful than the chapter 7 discharge. This means that chapter 13 will eliminate more types of debts than chapter 7.

Both discharge provisions are discussed below.

Your eligibility for a discharge can be challenged

While you have a right to file a case under the Bankruptcy Code, getting a discharge is more of a privilege.

It’s a privilege because it is not guaranteed as a party may object to you getting a discharge for various reasons.

Your discharge can also be revoked after it has been granted.

Discharge objections and revocations are also discussed below.

The dischargeability of a particular debt can also be challenged
A creditor may also object to the discharge of the debt you owe to the objecting creditor.
 
If the objection is successful, that creditor’s debt will not be discharged and you will remain liable after your case is over.
 
Dischargeability of a debt is also discussed below.
CHAPTER 7
discharge

All You Need to Know About the Chapter 7 Discharge

Discharge Eligiblity

  • 8 years must have passed since the date of filing of a prior chapter 7 case in which you received a discharge.
  • 6 years must have passed since the date of filing of a prior chapter 13 case in which you received a discharge.

Chapter 7 Discharges Most Consumer Debts

Chapter 7 discharges most consumer debts. Therefore, rather than itemizing all the debts the chapter 7 will discharge, it’s simpler to itemize the most common types of debts chapter 7 will not discharge.

Common debts that are not dischargeable in chapter 7
Domestic Support Obligations

Domestic support obligations include: child support, alimony or maintenance, and other financial support obligations arising out of your divorce proceeding.

Certain Unpaid Taxes

Determining dischargeability of unpaid taxes in bankruptcy requires a complex and delicate analysis. But here's a general guideline: Trust fund taxes (i.e. payroll taxes) are not dischargeable. Income taxes that were recently due or assessed are not dischargeable.

Criminal and Civil Fines

Criminal fines or restitution cannot be eliminated in chapter 7. Civil fines (e.g. parking tickets, tollway violations, red light camera, and speed camera tickets) cannot be discharged in chapter 7.

However, as of January, 2019, the City of Chicago has a new ticket policy through which fines for certain tickets will be waived if you receive a chapter 7 discharge.

CHAPTER 13
discharge

All You Need to Know About the Chapter 13 Discharge

Discharge Eligiblity

  • only 4 years must have passed since the date of filing of a prior chapter 7 case in which you received a discharge.
  • only 2 years must have passed since the date of filing of a prior chapter 13 case in which you received a discharge.

Chapter 13 Discharges More Types of Debts than Chapter 7

In addition to discharging everything a chapter 7 will discharge, the chapter 13 will also discharge certain types of debts the chapter 7 will not.

Chapter 13 Also Discharges These Additional Types of Debts
Civil Penalties and Fines

Civil fines such as parking tickets, tollway violations, speed camera violations, etc. can be discharged under chapter 13.

Divorce Property Settlements

Property settlement obligations arising out of your divorce can be discharged under chapter 13.

Unemployment Overpayments

If the Illinois Department of Employment Security wants to recover unemployment overpayments it determined were obtained through fraud, it may be possible to discharge most of the overpayment in chapter 13 because the Department may not seek a determination of nondischargeability for fraud in your chapter 13 case. The Department always does under chapter 7.

Unsecured Portion of Your Car Loan

It may be possible to discharge the unsecured portion of your car loan. In other words, the amount of the car loan that exceeds the retail value of your car. This procedure is called a "cramdown."

Property Damage From DUI Driving

You can discharge the damage you caused to property while driving under the influence of drugs or alcohol.

Fully Unsecured Second Mortgage

It's possible to discharge your second mortgage or home equity line of credit if the first mortgage of your home is completely unsecured. This is called a "lien strip."

Your Discharge Can be Denied or Revoked

Yes, a discharge can be denied and revoked. But the differences between the chapter 7 discharge and the chapter 13 discharge come into play again.

DENIAL
of discharge

A Chapter 7 Discharge Can Be Denied but a Chapter 13 Discharge Cannot be Denied

Denial of the chapter 7 discharge

Your chapter 7 discharge can be denied for various reasons, the most common of which are:

  1. Transferring, destroying, or hiding assets with the intent to hide it from your creditors within 1 year prior to filing your case, or while your case is pending.
  2. Failing to keep adequate financial records or destroying financial records within 1 year prior to filing your case.
  3. Making false statements under oath, withholding information and possessions, and otherwise scheming to hide assets and information about your financial affairs.
  4. Failing to adequately explain any loss of assets.

You can also go to 11 U.S.C. § 727(a) for a complete list of chapter 7 provisions available to deny your discharge.

Losing the discharge is a drastic outcome because you will never be able to discharge the debts encompassed by the denial in another bankruptcy again — you will be stuck with the debts forever.

Denial of discharge is the primary remedy invoked against people who get caught cheating the system.

The Bankruptcy Code allows a creditor, the trustee, or U.S. trustee, to object to the discharge.

A chapter 13 discharge cannot be denied

It's all about checks and balances in chapter 13

Because chapter 13 is a long-term reorganization it allows your creditors and the chapter 13 trustee to more meaningfully participate in your case and your financial affairs.

If any kind of fraud is discovered in your chapter 13 case, the court will not approve (i.e. “confirm”) your chapter 13 plan of reorganization and may dismiss your case.

Furthermore, if your chapter 13 plan was already confirmed, a party in interest may seek to revoke the confirmation order within 180 days after its entry if confirmation was procured by fraud.

Since your discharge is not at risk, there are other mechanisms in play to punish the debtor who attempts to commit bankruptcy fraud under chapter 13.

With the main mechanism being a referral by the U.S. Trustee to the United States Attorney from criminal prosecution.

Another, is to bar you from filing another chapter 13.

REVOCATION
of discharge

Both a Chapter 7 Discharge and a Chapter 13 Discharge Can Be Revoked

Revocation of the chapter 7 discharge

A chapter 7 discharge can be revoked within one year from the date it was granted, or within one year from the date it was granted or the chapter 7 case was closed — depending on the reason.

Probably the most common reason a creditor, chapter 7 trustee, or the U.S. Trustee would seek to revoke the discharge is if it was discovered that the discharge was procured through fraud and the fraud was not discovered until after the discharge had already been granted.

Other reasons for a revocation include failing to produce records for an audit or failing to satisfactorily explain a material misstatement in an audit, or failing to disclose the acquisition of property that would belong to the property of the estate.

Revocation of the chapter 13 discharge

A chapter 13 discharge can also be revoked if it was procured through fraud and if the fraud was not discovered after the discharge had already been granted.

To do so, a party of interest must make the request within one year from entry of the discharge order.

CHALLENGES
to dischargeability
of a debt

A Creditor May Object to the Dischargeability of a Particular Debt

In addition to being able to object to your entire discharge (at least under chapter 7), a creditor can also object to the discharge of the the debt you owe to the objecting creditor.

The creditor can object to the dischargeability of a debt in both chapter 7 and chapter 13.

COMMON
objections
False Pretenses, False Representation, or Acutal Fraud

The creditor may object by arguing you obtained money, property, services, or an extension, renewal, or refinancing of credit through false pretenses, false representation, or actual fraud, other than a statement about your financial condition.

See 11 U.S.C. § 523(a)(2)(A)

Materially False Statement in Writing

A creditor may try to object to the dischargeability of a debt by arguing that you made a materially false statement in writing about your financial condition with the intent to deceive and the creditor relied on your statement.

See 11 U.S.C. § 523(a)(2)(B)

Purchase of Luxury Goods and Cash Advances

If you use credit (from any one creditor) to purchase luxury goods in the amount of $600.00 or more or take a cash advance of $750.00 or more in the 90 days prior to the date of filing of your case, the creditor may object and the credit use will be presumed to be fraudulent.

See 11 U.S.C. § 523(a)(2)(C)

Willful and Malicious Injury

If you willfully or maliciously cause injury to another person or to property, the creditor may argue that the damages should not be discharged.

See 11 U.S.C. § 523(a)(6)

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