When filing bankruptcy, the main goal is to have your creditor(s) forgive outstanding debts or place you in a position to pay off your debt according to a court-specified plan that you and the court agree upon. The desired outcome of your bankruptcy case is to obtain a discharge. Discharge is a legal term that means you are no longer legally required to pay the debt listed in your bankruptcy case and those creditors cannot take any further action in an attempt to collect on the debt. At the end of your case, the federal court issues a discharge—an order removing your debts. As such, you are no longer obligated to pay your creditors once the court issues this order. You can obtain a discharge in both Chapter 7 and Chapter 13 bankruptcy.
In a Chapter 7 bankruptcy case, the trustee has the ability to sell your personal assets to satisfy outstanding debts. In most cases that we file, we are able to “exempt” all of a person’s assets and thus, the trustee is unable to sell the assets at that point. The discharge in a Chapter 7 bankruptcy occurs about three to four months after filing the petition (i.e. your case). Once you obtain a discharge, you are no longer financially obligated to pay those creditors subject to the case. Therefore, those creditors cannot try to collect on those debts after the debt is discharged. Once the discharge is entered, the Court generally closes the case by issuing a Final Decree. Generally speaking, that usually occurs within days after the discharge is entered. Whereas in a Chapter 13 bankruptcy, a discharge occurs three to five years after filing the petition. The reason for this is because you are entering into a Court administered repayment plan for those three to five years. In a Chapter 13 bankruptcy, once you have finished paying pursuant to your chapter 13 plan that you arranged with the court, you will obtain your discharge.
There are certain instances where your discharge can be denied. If the court dismisses your case, you are still obligated to pay your creditors and the debts are not discharge. The court can dismiss a case for a number of reasons, including but not limited to, defrauding creditors, failing to comply with a court order, perjury, failure to complete the required financial management and credit counseling courses, or insufficient assets to repay debts in your Chapter 7 case.
Exceptions to discharge
Unfortunately, there are certain types of debts that may not be discharged through bankruptcy. Section 523(a) of the Bankruptcy Code outlines the types of debts in bankruptcy that are not dischargeable. These include the following:
- Domestic obligations—child support, spousal support of other debts owed under a marriage settlement agreement
- Homeowners’ Association Fees-fees incurred after filing bankruptcy
- Retirement plan loans
- Court Costs
- Certain financial obligations resulting from criminal activity—fines, penalties and restitution
- Debts related to damages or injuries caused by DUI
- Debts not listed in your bankruptcy
- Debts not discharged in a previous bankruptcy
- Federal student loans
- Tax related debts*
Most taxes cannot be discharged through a bankruptcy case whether filing Chapter 7 or Chapter 13 bankruptcy. Moreover, if the government has filed a lien on your real or personal property prior to filing your petition, you still can be financially obligated to pay off the outstanding taxes to remove the lien. There are certain conditions where tax debts can be discharged in a bankruptcy case. Some factors to consider are: 1) the tax debt is income tax; 2) the tax was due, at minimum, three years prior to filing your bankruptcy petition; 3) your tax return was filed on time; 4) you did not avoid paying; 5) you did not commit fraud on your tax return.
Chapter 13 bankruptcy allows for some debts to be discharged that cannot otherwise be discharged through a Chapter 7 bankruptcy. Given that Chapter 7 bankruptcy cases are subject to many exceptions, debtors should consult with competent legal counsel before filing such a case to discuss the scope of what debts can be discharged through their bankruptcy case.
End of Bankruptcy Case
The court, after issuing a discharge, sends a copy of this order to all of the creditors listed in your bankruptcy case. Thereafter, the creditors, collection agencies, or attorneys cannot collect on the debt, unless the debt has been excepted from discharge. Therefore, you cannot be sued on the debts that are discharged through bankruptcy. Further, the IRS cannot impose penalties or tax you on the discharged debt. For example, if you owed $10,000.00 on a credit card prior to filing your bankruptcy case, that credit card company cannot try to collect on that debt once the discharge is entered. If they do, they can be sanctioned by the Bankruptcy Court (see below).
In the event creditors call after receiving a discharge in your case, you can move to sue the creditors for contempt of a court order. All of the creditors listed in your bankruptcy petition will have received notice from the court advising them that they cannot contact you about the discharged debt and that the debtor has a right to sue. Although a creditor cannot contact you about the debt discharged, this does not preclude creditors from attempting to repossess the property, such as a car, if the payments are not voluntarily made. If creditors are contacting you after receiving a discharge in your bankruptcy case, contact your bankruptcy attorney.
Finally, there are some negative consequences of obtaining a bankruptcy discharge. The bankruptcy will remain on your credit reports for up to seven or ten years from the date of filing your case depending on the type of case you file. As such, filing bankruptcy will affect your credit score. This can make it difficult to apply for a loan or a credit card. You will want to consult with an experienced bankruptcy attorney to discuss the implications of filing a Chapter 7 or Chapter 13 bankruptcy case and how it will impact your credit score and ways to rebuild your credit score after obtaining a discharge.
Conclusion
As discussed above, the main goal of both Chapter 7 and Chapter 13 bankruptcy cases is generally receiving a discharge relieving a debtor of certain debts. Depending on the type of bankruptcy you choose to proceed with will determine what debt is discharged and what happens to your property during and after your case. This should be discussed with a highly trained bankruptcy attorney. Here at Sacramento Bankruptcy Lawyer, we would love the opportunity to discuss your case with you and assist you in choosing the most beneficial option.
We help clients in the following areas: Sacramento, Elk Grove, South Sacramento, West Sacramento, Natomas, Citrus Heights, Antelope, Fair Oaks, Gold River, Rancho Cordova, Roseville, Rocklin, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.
