What is a Bankruptcy Discharge?

The bankruptcy discharge is the order from the bankruptcy court that relieves the filer of the obligation to pay their discharged debts. It also prohibits creditors from ever trying to collect on that debt ever again. In other words, the discharge is a filer’s main goal in a bankruptcy, whether that’s a Chapter 7 bankruptcy or Chapter 13 bankruptcy. Let’s take a closer look at how this all works, what debts can’t be discharged, and what this all means for you. 

Permanent debt relief in the form of a bankruptcy discharge

At the end of a successful bankruptcy case the bankruptcy court issues a bankruptcy discharge order, which erases the filer's personal liability to pay back the debt. That discharge is generally permanent. Although a bankruptcy discharge can be revoked, it's rare. It typically happens if it's later discovered (usually either by the case trustee or the U.S. Trustee) that the filer lied in their bankruptcy petition, didn't list all of their income or assets, or committed some other type of bankruptcy fraud. 

The filer never has to pay back discharged debt. It's illegal for creditors to try to collect on discharged debt. If they do, the filer can bring legal action against the creditor, which can force them to pay a penalty for violating the discharge order. 

The bankruptcy discharge and the automatic stay both stop creditors from taking collection action against you. The difference is that the automatic stay happens automatically after bankruptcy filing and is temporary, while discharge is granted in successful bankruptcy cases and is generally permanent. The filer has to meet certain conditions to receive a bankruptcy discharge. That includes attending the meeting of creditors, filing all necessary bankruptcy paperwork, providing documents the bankruptcy trustee requests, completing credit counseling and financial management courses, and anything else that is required in the filer's specific circumstances. 

Bankruptcy discharge erases debts and opens the pathway to rebuilding credit with a clean slate and the financial relief you need. Your medical bills and credit card debts will report a zero balance on your credit report. As you rebuild your credit after bankruptcy, lenders will view you as a more favorable candidate for loans and lines of credit. 

Who is eligible for a discharge in Chapter 7? 

Chapter 7 bankruptcy allows the filer to eliminate their obligation on all dischargeable debts and in the majority of cases this is done without the creditor receiving any funds from the bankruptcy trustee. Since this form of debt relief is so wide-ranging and powerful, there are certain limits with respect to who can obtain a Chapter 7 discharge. 

The means test

The basic proposition of the means test is that you can’t make too much money and still walk away from all of your debts without any further obligation to pay them back. If you have the “means” to pay for even a portion of your debts, the law requires that you do so through a Chapter 13 bankruptcy. 

The means test is a review of your income and expenses. If your income falls below your state's median income for your household size, then you automatically qualify for Chapter 7 bankruptcy. Filers with below-median income don't have to complete the full means test. Your gross income is considered - not your income after withholdings and taxes are deducted from your paycheck. Also, the median income by state is updated a few times a year, so make sure you're looking at the most recent numbers. 

If your income is above your state's median income for your household size, then you must complete the full means test analysis to determine whether you qualify for bankruptcy protection under Chapter 7. Having a high income doesn’t necessarily mean you can't qualify for Chapter 7 bankruptcy. Subtracting your allowable expenses from your income in the means test form will show whether Chapter 7 bankruptcy is an option for you. 

Not passing the means test also doesn't mean you can't get any bankruptcy protection. It just means that you need to file Chapter 13 bankruptcy instead of Chapter 7. In a Chapter 13 you pay back what you can afford in a 5-year repayment plan before having the balance of your debt discharged. 

Prior discharge

The United States Bankruptcy Code limits how often an individual can receive a bankruptcy discharge. This is meant to prevent people from taking advantage of the system. The law will not allow a person to erase their debts through bankruptcy every year. How often you can receive a bankruptcy discharge depends on which type of bankruptcy you file. 

If you were granted an order of discharge in a previous Chapter 7 bankruptcy case, you must wait at least 8 years from the date of filing that case before you're eligible to get a second bankruptcy discharge. 

If you received a discharge in a previous Chapter 13 bankruptcy case, generally you must wait at least 6 years from the date the Chapter 13 case was filed before you're eligible to receive a discharge in subsequent Chapter 7 bankruptcy. There is no lifetime cap on how many bankruptcy discharges you may receive.

What kind of debt can’t be discharged? 

Most debts are eliminated when your Chapter 7 discharge is granted, but some are not. Let’s take a look at some of the most commonly held debts that aren’t always automatically discharged (or discharged at all) in a Chapter 7 case. 

Different types of debts are treated differently in bankruptcy. Dischargeable debts are erased in bankruptcy. Debts that can't be erased through bankruptcy are known as non-dischargeable debt. These debts must be paid back after a successful bankruptcy. The most common non-dischargeable debts are recent tax debts, child support or alimony payments, and—in some cases—student loans. 

Also, you can't erase debts in bankruptcy that were incurred fraudulently – meaning you can't make purchases or charge up credit cards with the intent to discharge that debt in bankruptcy. If your creditor suspects fraud, they can ask the bankruptcy court to order that your discharge not apply to their debt. 

The Chapter 13 “Super Discharge”

Certain types of debt that can't be discharged in a Chapter 7 bankruptcy can be discharged in a Chapter 13 bankruptcy. These debts include debts incurred to pay non-dischargeable tax debts, debts for willful or malicious injury to property, and debts arising from property settlements in divorce proceedings. Only property settlement debts and other debts resulting from a court order in a divorce that are not domestic support obligations (alimony, child support) can be discharged in Chapter 13 bankruptcy. Alimony and child support are non-dischargeable debts in both Chapter 7 and 13 bankruptcies and cannot be erased. 

So, my Chapter 7 is done when my discharge is entered, right? 

In a lot of cases, this is basically correct. When a trustee doesn’t find any unprotected assets to sell for the benefit of your creditors and alerts the court to that fact by filing a report saying as much, your case will be closed by the court shortly after your discharge is entered. Asset cases - cases where the trustee is distributing funds to your unsecured creditors - can stay open for much longer. As long as it is necessary, really. Often times the person who filed bankruptcy doesn’t have much involvement in the case during this stage. But, you do remain obligated to cooperate with the trustee during the entire time your case is open. If you don’t, you risk having your discharge revoked. 

Conclusion

Receiving a bankruptcy discharge is the main goal in filing for bankruptcy. Your discharge order erases your debts and makes it that your creditors can never attempt collection activity against you again for those discharged debts. Bankruptcy gives filers the financial fresh start that they need. Once you get your discharge, make sure to keep a copy of the order with your important documents, so you have it handy in case you need it.

It's not a bad idea to talk to a bankruptcy attorney if you need debt relief and are worried about passing the means test. Even if your family makes a lot of money you can still qualify for Chapter 7 bankruptcy or may have other options that will help you get out of debt. A bankruptcy lawyer can help you determine if you qualify for Chapter 7 bankruptcy or another type of relief. 

Also, if a lot of your debt is non-dischargeable, talking to a bankruptcy lawyer can help you understand what solutions are available to you. You can get a free bankruptcy evaluation and learn more about your options. You may be able to get free bankruptcy help from us. Here at Upsolve we help people who can't afford to hire an attorney for their Chapter 7 bankruptcy.