Discharge in Chapter 7

Posted by Kevin on March 27, 2016 under Bankruptcy Blog | Be the First to Comment

The policy behind bankruptcy is to give an honest debtor a fresh start.  The fresh start begins with the filing of the bankruptcy petition.  By just filing, almost all attempts at collection of a debt are stopped by the automatic stay.  The fresh start is completed when the debtor receives a discharge.  A discharge means that the debt is cancelled, wiped out.

Not all debts are discharged, however.  And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery.  For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt.  Say, you borrower $500,000 from the bank.  You sign a note which is a promise to pay back the $500,000 with interest.  That is the debt.  And you sign a mortgage which is the collateral for the debt.  The mortgage says that if you do not pay back the $500,000, the bank can take your house.  The bankruptcy discharge knocks out the note, the debt, but not the mortgage.  So, the lender can foreclose on the house and get what it is owed from the house.  What if the house is only worth $300,000?  Then, that is what the bank gets.  The bank cannot come after you for the deficiency because the debt is discharged.

What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.

The Bankruptcy Code, however, does not discharge all debts.  Some are dischargeable sometimes.  Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship.  The burden is on the debtor to prove undue hardship which is not easy in New Jersey.  Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge.  The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.

Payroll and sales taxes are not dischargeable (called trust fund taxes).  Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.

So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.