Bankruptcy offers overwhelmed consumers an opportunity for a new beginning through either the liquidation (Chapter 7) or reorganization (Chapter 13) of debt. In both cases, the bankruptcy court is said to “discharge” the debts. This means creditors lose the right to take action against a person, such as making collection or repossession attempts. Bankruptcy is a “reset” button that allows consumers to catch their breath and begin rebuilding their credit score. However, a common question is what debt can and cannot be discharged when filing for bankruptcy?
A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from burdensome debts. The United States Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:
“[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
While society believes in second chances, bankruptcy is not an answer to everything. Not all debts can be discharged, and several others are very difficult to discharge. It is important to hire an attorney who can guide you through bankruptcy so you can make the best decisions for your individual circumstances. The attorneys at Fesenmyer Cousino Weinzimmer have decades of experience with bankruptcy cases and will walk with you every step of the way. For an initial consultation, contact the firm at 877-654-LAWS.
Debts That Can Be Discharged in Bankruptcy
In general, the following unsecured debts are dischargeable:
- credit card debt
- personal loans
- medical debt
- other consumer debts
Secured debts such as home mortgage payments and car loan payments can be included in the discharge, however secured liens would remain on the property. If you are current on payments, then you can generally retain those assets. However, if you are behind on payments the lien holders will likely repossess or foreclose on that asset. Debtors filing bankruptcy who want to keep their houses and cars can incorporate repayment of missed payments into a Chapter 13 bankruptcy repayment plan.
Debts Generally Not Dischargeable in Bankruptcy
The U.S. Bankruptcy Code lists different categories of debts that cannot be discharged. Creditors will still be able to collect these debts from you despite your declaring bankruptcy. Perhaps the most common debts that cannot be discharged under any circumstances are child support, back taxes, and alimony.
Here are some of the most common categories of non-dischargeable debt:
- Debts that you left off your bankruptcy petition, unless the creditor had knowledge of your filing
- Many types of taxes
- Child support or alimony
- Fines or penalties owed to government agencies
- Student loans, unless you can prove undue hardship
- Personal injury debts arising out of a drunk driving accident
- Debts arising out of tax-advantaged retirement plans
- Condo or cooperative housing fee debts
- Attorneys’ fees for child custody or support
- Criminal restitution and other court fines or penalties
- Debts obtained through fraud
- Debts for willful injury or wrongful death
- Debts where the borrower was acting in a fiduciary capacity
Other categories of non-dischargeable debts require a creditor to successfully challenge your discharge during the bankruptcy in order for them to be non-dischargeable.
Two Types of Personal Bankruptcy
Understanding Chapter 7 Bankruptcy
If your income is too low to pay credit card bills, medical bills, utilities, payday loans or personal loans, Chapter 7 may be the best option. The process is over in a few months, so you can begin rebuilding credit quickly. Upon discharge of your Chapter 7, you will have little or no debt remaining, and lenders may feel that you will be better able to repay your debts in the future. After your debts are discharged in a Chapter 7 bankruptcy, many people finance vehicles and receive solicitations for unsecured credit within months. In addition, you may be eligible to purchase a home within two years of your bankruptcy discharge.
Chapter 7 Bankruptcy Can Protect You From:
- Creditor harassment
- Vehicle repossession debt
- Wage garnishment
- Civil lawsuits
- Unpaid cosigned debts
Am I Eligible?
Not everyone is eligible for Chapter 7 bankruptcy protection. Your income and debt will be subjected to something called a “means test” to determine if you qualify. If you are not eligible for Chapter 7, Chapter 13 bankruptcy is another form of relief.
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.
What About Secured Debt?
Debts backed up by property, such as home mortgages or automobile loans, are secured debts. The debt will be discharged but the lender is entitled to recover the property used as security. If you want to keep the property, you do have alternatives. You can negotiate with the lender while in bankruptcy to alter the terms of the original loan. The lender might be willing to extend your loan so that the payments are more affordable or might offer a reduced principal balance on the loan. You also have the option of keeping the property if you pay its current value to your lender. Our experienced attorneys can review your individual situation and go over all of the options with you.
What is Chapter 13?
Chapter 13 is a consumer debt reorganization that enables debtors to repay financial obligations affordably and in one monthly payment over a three- to five-year period. Chapter 13 is an option that is available to help take the control back from your creditors that are foreclosing on your home or repossessing your vehicle that you want to keep. Chapter 13 allows you to repay a portion of your debt through a court-approved repayment plan that you can afford. Once you successfully complete the repayment plan, the remaining eligible debt is discharged. You will also get relief from harassment by creditors, who must stop all collection activity during the term of repayment.
Chapter 13 bankruptcy is often the best choice for homeowners with more equity in secured assets than they can protect with their Ohio bankruptcy exemptions and who wish to keep these assets, or for people whose income is too high to qualify for a Chapter 7 bankruptcy. To file Chapter 13 bankruptcy you must have a regular source of income and have some disposable income to apply toward your Chapter 13 payment plan.
Is Chapter 13 right for you and are you eligible? A free consultation with an experienced and compassionate Ohio bankruptcy attorney at Fesenmyer Cousino Weinzimmer can help you decide.
How Chapter 13 Works
Chapter 13 is a repayment plan. If you have a regular source of income and some disposable income, you would choose Chapter 13 when:
- You are behind on your house or car payments.
- Your assets are not exempt.
- Your debts are not dischargeable.
- You have a pending foreclosure.
Under Chapter 13, the U.S. Bankruptcy Code gives you up to five years to repay your creditors. The minimum amount you will have to repay depends on how much you earn, how much you owe and how much your unsecured creditors would have received if you had filed for Chapter 7.
Confused About Which of Your Debts Are Dischargeable?
A personalized review of your circumstances with an experienced bankruptcy lawyer is the best way to understand what bankruptcy can and cannot accomplish in your case. Plan now to reclaim control of your financial future. Take advantage of a free initial consultation with an attorney at Fesenmyer Cousino Weinzimmer at one of our offices in Columbus, Dayton or Cincinnati.
Our Ohio bankruptcy lawyers are prepared to evaluate your financial situation and find the best form of debt relief suitable to your goals and circumstances.
Send an inquiry by email or call 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati).
Talk to the skilled, experienced attorneys at Fesenmyer, Cousino and Weinzimmer. Trust our knowledge and count on our help. We offer free initial consultations.
What Is a “Discharge” in Bankruptcy?
A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.
When Does the Discharge Occur?
The timing of the discharge varies, depending on the chapter under which the case is filed. In a Chapter 7 (liquidation) case, the discharge typically occurs about four months after the date the bankruptcy petition is filed. In a Chapter 13 case, the discharge occurs after the three to five year repayment plan.
In a Chapter 13 (adjustment of debts of an individual with regular income) case, the court generally grants the discharge as soon as practicable after the debtor completes all payments under the plan. Since a chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing.
What Is a Creditor?
A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. A business who provides supplies or services to an individual and does not demand payment immediately is also considered a creditor, based on the fact that the client owes the business money for services already rendered.
Creditors can be classified as either personal or real. People who loan money to friends or family are “personal” creditors. “Real” creditors such as banks or finance companies have legal contracts with the borrower, sometimes granting the lender the right to claim any of the debtor’s real assets (e.g., real estate or cars) if he or she fails to pay back the loan.
Can a Debtor Receive a Second Discharge in a Later Chapter 7 Case?
A debtor cannot receive a discharge in a Chapter 7 bankruptcy if:
- The debtor had a prior discharge in a Chapter 7 case filed within eight years, or
- The debtor had a prior discharge in a Chapter 13 case filed within six years (unless certain amounts of unsecured debts were paid).
A debtor cannot receive a discharge in a Chapter 13 bankruptcy if:
- The debtor had a prior discharge in a Chapter 7 case filed within four years, or
- The debtor had a prior discharge in a Chapter 13 case filed within two years.
A debtor could still file a Chapter 13 even if the timelines above have not expired, but any debt not paid in full through the Chapter 13 plan would remain when the repayment plan was completed.
Can the Discharge Be Revoked?
The court may revoke a discharge under certain circumstances. For example, a trustee, creditor, or the U.S. trustee may request that the court revoke the debtor’s discharge in a Chapter 7 case based on allegations that the debtor: obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case.
What Can the Debtor Do If a Creditor Attempts to Collect a Discharged Debt After the Case is Concluded?
If a creditor attempts collection efforts on a discharged debt, the debtor can file a motion with the court, reporting the action and asking that the case be reopened to address the matter. The bankruptcy court will often do so to ensure that the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of a lawsuit, designed to collect a discharged debt. A creditor can be sanctioned by the court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by a fine.
Can an Employer Terminate a Debtor’s Employment Solely Because the Person Was a Debtor or Failed to Pay a Discharged Debt?
The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case.
The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.
Contact Fesenmyer Cousino Weinzimmer for Bankruptcy Help
If you are still wondering which of your debts can be discharged in bankruptcy, contact us. Our Ohio bankruptcy lawyers are prepared to evaluate your financial situation and find the best form of debt relief suitable to your goals and circumstances. Send an inquiry by email or call 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati).