What Is a Bankruptcy Discharge?

A bankruptcy discharge, also known as a discharge in bankruptcy, refers to a permanent court order that releases a debtor from personal liability for certain types of debts. It is sometimes referred to simply as a discharge and comes at the end of a bankruptcy. After it is issued, the court absolves the debtor of the obligation to repay their debts, and creditors are not permitted to contact or pursue debtors for the outstanding debt.

Key Takeaways

  • A bankruptcy discharge refers to an order that releases a debtor from personal liability for certain types of debts.
  • Creditors are not permitted to contact or pursue debtors for the outstanding debt.
  • The timing of the discharge varies based on the type of bankruptcy filed, but it’s normally granted as soon as possible.
  • Debts not subject to discharge include child support, alimony, debts for injuries to person or property, condo fees, certain retirement plan debt, DUI debts, and student loans.

How a Bankruptcy Discharge Works

A bankruptcy discharge provides relief to a debtor, as it means they are no longer legally required to pay back debts that have been discharged. The subject of a bankruptcy discharge must meet certain requirements before it is granted, and the timing of the discharge varies based on the type of bankruptcy filed. The court typically grants the discharge as soon as possible. Chapter 7 bankruptcies generally receive a discharge after about four months from the time the bankruptcy petition is filed, while a Chapter 13 bankruptcy discharge is issued after the debtor completes all payments under the plan. This is normally between three and five years.

The debtor usually receives a discharge automatically upon applying, unless there is litigation involving objections to the discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and, if one exists, the trustee’s attorney. The debtor and the debtor’s attorney also receive copies of the discharge order.

The notice is simply a copy of the final order of discharge and is not specific to the debts the court determines should not be covered by the discharge. The notice informs creditors that the debts owed to them have been discharged and they should not attempt any further collection. The notice also cautions that they may be subject to punishment if they continue collection efforts. Any failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order within the time required by the rules does not affect the validity of the order granting the discharge.

Which Debts Get Discharged in Bankruptcy?

Debts that are part of a Chapter 7 discharge include unsecured debts, collection agency accounts, medical bills, utility bills, dishonored checks, certain tax penalties, attorney fees, judgments from lawsuits, and any lease contracts a consumer may have. Credit card debt is one of the most common types of debt to be discharged in bankruptcy. A discharge in bankruptcy order does not, however, discharge all debts. In fact, there are more than a dozen types of debt that are exempt from discharge for bankruptcy filings.

In 2020, the CARES Act provides temporary relief to Chapter 13 debtors who have a confirmed plan. A revised provision in the bankruptcy code allows those who have experienced financial hardship to extend their plan for up to seven years.

Limitations of Bankruptcy Discharge

Contrary to what some consumers may believe, bankruptcy is not always the best option in a financial crisis, and a bankruptcy discharge may not relieve them from the obligation of paying off all their debts. Simply put, there are some debts that just can’t be discharged.

According to the Federal Judiciary, there are 19 different types of debt that are not eligible for discharge. The most common are spousal child support, alimony payments, and debts for willful and malicious injuries to person or property. For certain kinds of bankruptcies, condo fees, debts owed to some tax-advantaged retirement plans, debts from DUIs, and student loans are also among them. And any debt not listed on the bankruptcy cannot be discharged. In addition, valid liens on specific property to secure payment of debts that have not been discharged will remain in effect after the discharge, and a secured creditor has the right to enforce the liens to recover such property.

As mentioned above, creditors listed on the discharge are not permitted to contact the debtor or pursue collection activity, and a debtor may file a report with the court if a creditor violates the discharge order. The court may sanction the creditor with civil contempt, which also may be accompanied by a fine.

Challenges after bankruptcy

Many consumers may find it challenging when they apply for credit after receiving a discharge. Even though they may be discharged from their financial obligations, bankruptcies stay on their record for a period of seven to 10 years, depending on the type of bankruptcy filed. Consumers may try to rebuild their credit files with secured credit cards and loans. In the case of jobs, a potential employer may not hire a candidate who has filed for bankruptcy, especially for bonded positions. However, employers cannot fire an existing employee who is going or has gone through the process of bankruptcy.

Can Bankruptcy Discharge Be Denied?

A court can deny a discharge in Chapter 7 for a number of reasons, including, among others, the debtor's failure to provide tax documents that have been requested, destruction or concealment of books or records, violation of a court order or an earlier discharge in an earlier case that began within eight years before the date the second petition was filed, and failure to complete a course on personal financial management. In addition, a creditor, trustee in the case, or U.S. trustee may file an objection to the debtor's discharge. 

A discharge may also be denied in Chapter 13 if the debtor doesn't complete a course on personal financial management or if they've gotten a prior discharge in another Chapter 13 case within two years before the filing of the second case, with a few exceptions. A court may even revoke a discharge under certain circumstances, such as allegations that the debtor obtained the discharge fraudulently or fails to provide documents or information requested in an audit of the case.