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Bankruptcy Law: Effect of Bankruptcy Discharge


To the debtor, the biggest benefit to filing for bankruptcy is the discharge of debts. Discharge means the elimination of liability for a debt. Bankruptcy prioritizes debts and manages the debtor's assets in such a way that it can pay creditors in an orderly fashion. Once those assets are expended, any debt not yet paid is discharged. The debtor is no longer legally bound to repay the discharged debt, and creditors may not pursue collection of these debts. However, discharge is not automatic and some debts are not dischargeable at all. With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, there are more stringent criteria for a consumer to meet in order to discharge debt. The focus is on repayment of debt.

Discharge in Bankruptcy

Although creditors may not take the debtor to court to collect on the debt, or take any other steps to recover a debt, creditors may have a few options depending on their circumstances. For one, discharge applies only to the debtor involved in the bankruptcy. When more than one person is liable for the obligation, the creditor may pursue collection from the others. Secondly, when the debt was secured with a piece of property, the creditor may still foreclose on the property. Occasionally, a debtor will agree to pay the debt despite the discharge. This is called "reaffirmation" and is often agreed to by the debtor so they can keep property, which the creditor would otherwise be able to take. Reaffirmation agreements are closely scrutinized and, to avoid the possibility of an agreement made under pressure, they will only be binding if a number of requirements are met. When a debt is not discharged, technically, the debtor is still obligated to repay the creditor, though practically speaking, it is unlikely that the debt will be recovered.

The bankruptcy law has a number of rules concerning the discharge of debt. Availability of discharge depends on the chapter under which the bankruptcy proceedings are conducted and whether the debtor is a person or organization. One rule, which applies in all chapters, however, is that a debtor guilty of misconduct during the course of the bankruptcy proceeding will be denied discharge.

For policy reasons, Congress made certain types of debt nondischargeable when it crafted the bankruptcy laws. Depending on the chapter under which bankruptcy is filed, these include, but are not limited to:

  1. certain taxes and fines;
  2. debts arising out of fraudulent acts on the part of the debtor;
  3. debts not mentioned by the debtor;
  4. alimony, maintenance and support payments;
  5. debts arising from a willful and malicious injury;
  6. educational loans;
  7. debts owed as a result of driving while intoxicated;
  8. debts that were not discharged in prior bankruptcy proceedings;
  9. certain debts arising from obligations to banks and similar institutions;
  10. debts incurred for the purpose of paying state or local taxes;
  11. loans from pension, profit sharing, stock bonus or other tax-sheltered plans; and
  12. debts incurred to pay fines or penalties under federal election laws.

Chapter 7 is the most common form of bankruptcy. Individuals and businesses may file for Chapter 7 bankruptcy, but the discharge of debt under Chapter 7 applies only to individuals, not businesses. All of the nondischargeable debts listed above apply in Chapter 7. The rest of the debts are discharged except, generally speaking, those to which the debtor obligated himself after he was declared bankrupt by the bankruptcy court. An individual debtor must complete a personal financial management course before a discharge will be granted under Chapter 7.

Chapter 13 is available only to individuals. Under Chapter 13, the debtor creates a three- or 5-year plan based on means for repayment of all or a portion of his or her debt. Nondischargeable debts in Chapter 13 are similar to those in Chapter 7. When a debtor cannot successfully complete a Chapter 13 plan, he or she may choose to convert the case to a Chapter 7 bankruptcy or to request a hardship discharge. A hardship discharge will only be granted by the court under certain limited circumstances and will discharge no more debts than Chapter 7 bankruptcy would. An individual debtor must complete a personal financial management course before a discharge will be granted under Chapter 13.

Just about everyone is eligible to file Chapter 11. Under Chapter 11, discharge is granted to an individual debtor when repayment is completed. When the debtor is a business entity, all debts are discharged and the only obligations the debtor has are those outlined in the plan. The individual filing under Chapter 11 must pay those debts outlined in the payment plan in addition to any debts listed as nondischargeable under Chapter 7.

Chapter 12 is limited to family farmers and family fisherman, meaning both individuals and certain businesses. Discharge under this chapter is usually granted upon completion of a plan. A hardship discharge is also available under this chapter. Remaining debt is discharged except for nondischargeable debts under Chapter 7 and any long-term debts that extend beyond the completion of the plan.


The discharge of debt varies under the different chapters of bankruptcy. The effect of the discharge, however, is the same. The debtor is no longer liable for those discharged obligations and creditors are forbidden to pursue payment from the debtor. Creditors do have collection options, however, especially when they plan carefully before bankruptcy is filed. To best evaluate the effect of bankruptcy discharge on you as a debtor or creditor, seek the counsel of an experienced bankruptcy attorney.

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