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In a bankruptcy case, discharge from bankruptcy means that a judge has declared that you are no longer responsible for paying your debts. It is a permanent action that affects some types of debt, but not all.
Although a discharge cancels some debts and can help put your finances in order, bankruptcy remains on your credit report for seven or ten years, depending on the type of bankruptcy.
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What is a bankruptcy discharge?
A bankruptcy discharge permanently prevents a creditor from trying to collect discharged debts. A discharge can occur in four types of bankruptcy cases:
- Chapter 7. This is the most common form of personal bankruptcy. A Chapter 7 bankruptcy can eliminate most of your debts by selling or liquidating many of your personal assets.
- Chapter 11. Businesses typically use this type of bankruptcy, but individuals can also file. A Chapter 11 bankruptcy establishes a debt repayment plan.
- Chapter 12. This type of bankruptcy aims to establish a debt repayment plan for family farmers and family fishers.
- Chapter 13. Designed for individuals, Chapter 13 bankruptcy places a debtor on a repayment plan.
How Does Bankruptcy Discharge Work?
Bankruptcy discharge only applies to debts that you accrued prior to declaring bankruptcy.
According to the United States Department of Justice, it is important to list all of your assets and debts in bankruptcy documents. If you fail to mention a debt, a judge cannot discharge it. Also, a judge can refuse to pay a debt if, for example, you hide property or falsify records.
A Chapter 7 bankruptcy filer generally gets an automatic discharge of eligible debts, such as credit card bills, unless legal challenges have been raised about a requested discharge. Meanwhile, debts included in a Chapter 13 bankruptcy can be discharged, but normally are not since this type of bankruptcy usually involves debt restructuring. Chapter 7 and Chapter 13 are the two most common types of bankruptcy.
How long does it take to get a discharge?
In a Chapter 7 bankruptcy case, a discharge can take four to six months. In other bankruptcy cases, including Chapter 13, payments are often made over a period of three to five years, so typically a discharge takes about four years.
What debts are discharged in the event of bankruptcy?
A table of debts can be discharged in a case of bankruptcy. Some of them include:
- Credit card bills
- Debt that has been turned over to a collection agency
- Medical bills
- Personal loans from friends, relatives and employers
- unpaid rent
- Overdue utility bills
- Most civil court judgments
Not all debts can be discharged in bankruptcy. Some of the debts exempt from discharge include:
- Most federal, state, and local taxes
- HOA dues
- Car loans
- Most student loans
- Debts secured by liens
- Judicial fines
- Criminal restitution
- Attorney fees
- Cases of bodily injury related to driving while intoxicated or under the influence of drugs
Can a bankruptcy discharge be refused?
A judge may deny a bankruptcy discharge for several reasons, such as:
- Not keeping financial records properly
- Committing a crime related to the bankruptcy case
- Failure to comply with a bankruptcy court order
- Fraudulently transferring, concealing or destroying property purporting to be part of the bankruptcy case
- Not taking a court-ordered financial management course
Bankruptcy discharge and student loans
You may be able to get your federal and private student loans canceled if the bankruptcy court approves your request through what’s called an “adversarial process.” In this application, a Chapter 7 or Chapter 13 bankrupt declares that paying off student loan debt would cause financial hardship for him and his dependents.
Positive scenarios that could result from a hardship case include:
- Your student loan debt is fully paid, which means you owe no debt.
- Your student loan debt is partially discharged, which means you have to pay off some of the debt.
- Your student loan debt isn’t discharged, but you qualify for better terms, like a lower interest rate.
In 2021, the American Bar Association, a group of lawyers and law students, urged Congress to change the US bankruptcy code to give borrowers the option to repay student loans without proving that repayment of the debt would impose “undue hardship” on them or their dependents.
The proposed federal Fresh Start Through Bankruptcy Act of 2021 would make federal student loans eligible for bankruptcy discharge 10 years after the first loan payment is due. Additionally, the law would retain the current “undue hardship” release option for private student loans and for federal student loans less than 10 years past due.
“Student loan debt follows you to your grave. For years, I have supported allowing troubled borrowers to repay their bankrupt loans as a last resort,” said U.S. Senator Dick Durbin, D-Illinois, co-sponsor of the Fresh Start legislation, in a statement. Press release.
Can a creditor attempt to recover a paid debt?
Debt collectors cannot attempt to collect debts that have been discharged in a bankruptcy case. Also, debt collectors are not allowed to attempt to collect a debt while a bankruptcy case is pending.
If you think a creditor has violated the court’s ban on contacting you about a discharged debt, consider asking a lawyer about your legal options. If a creditor attempts to collect a discharged debt, a debtor can report this to the bankruptcy court and request that their case be reviewed. A judge can punish a creditor who broke the no-contact rule.
Discharge from bankruptcy vs dismissal
In bankruptcy, a discharge is a good thing. On the other hand, a layoff might not be such a good thing.
A discharge in a bankruptcy case means that all permitted debts have been cancelled. Meanwhile, a dismissal refers to the referral of your case by a bankruptcy court. Reasons your case could be rejected include failing to submit proper documentation, failing to provide requested documents or showing up for a court appearance, or seeking a type of bankruptcy that does not qualify. does not apply to you.
Bankruptcy discharge and your credit
Filing for bankruptcy and discharge from bankruptcy can hurt your credit. This is because filing for bankruptcy and discharged debts can remain on your credit report for seven or 10 years. However, a debt that appears on your credit report as paid may be less damaging than an unpaid debt that lingers on your credit report indefinitely.
A Chapter 7 bankruptcy falls off your credit report after 10 years. For Chapter 13 bankruptcy, it’s seven years.
Keep in mind that a paid debt may not appear on your credit report as paid. If you notice that a paid debt is misclassified on a credit report, notify the credit bureau that produced the report and request that the error be corrected. Each year, you can get a free credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) through annualcreditreport.com.
Fortunately, if you manage your credit responsibly after completing the bankruptcy process, the impact of bankruptcy on your credit score will fade over time. You may even see an improvement in your credit score within 12 months of closing a bankruptcy case.
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