A Fresh Start: Debt Discharge
When people file bankruptcy, they are universally looking for relief from the pressure of paying debts with money they need for daily life. It is very difficult to live in the US without using credit cards. Wages haven’t been growing, but the cost of most of the things you need is. Many Americans have inadequate or no health insurance, and wind up with huge bills for life-saving procedures.
What they are picturing, usually, is what the Bankruptcy Code refers to as “discharge.” According to the Code, a discharge, “voids any judgment… [that is a] personal liability of the debtor… ; [and] operates as an injunction against… an action… to collect, recover, or offset any such debt… .” 11 USC § 524(a)(1)-(2). What it amounts to is the elimination of any legal obligation you had to pay the debt.* Now, technically, the debt still exists. Your creditors are legally prevented from doing anything to collect on it, though. If they do, they can face legal consequences. In essence, from the perspective of a discharged debtor, the debt might as well not exist.
The discharge is also why I try to put as many of my clients into Chapter 7 bankruptcies as I can. See, after you file a Chapter 7, you will probably be in and out in about three months. With a Chapter 13, the other main option for most individuals, you will have to make monthly payments for three or five years before the court will discharge the remainder of your debts. Now, there are reasons someone would want to file a Chapter 13, but the almost immediate relief that comes with getting everything done at once when the Chapter 7 discharge comes through is a big advantage and hard to pass up.
There are some important exceptions to the discharge. First, when I said it’s the elimination of your obligation to pay, I meant only yours. If anyone else is obligated to pay the loan, their obligation is not discharged. Second, there are various types of loan that are not entitled to discharge. Student loans are the biggest category; in 1976 Congress made all student loans non-dischargeable. Tax debts are also non-dischargeable except under certain circumstances. Also, if your debt came from a judgment of damages for harming someone else intentionally, or from fraud, you are stuck with it. Third, though secured debts can be discharged, bankruptcy doesn’t affect the mortgage or lien on the collateral. True, the bank can’t foreclose while the automatic stay** is in place, but once your case is over it will be able to if you haven’t been making payments.
Still, in cases under both Chapters, most people come out the other end with their unsecured debts eliminated, or just about. Most find it was worth it to spend a bit of money paying an attorney to cut themselves loose from tens of thousands of dollars of debt. After it’s gone, they get their fresh start, free from the financial weight and aggravation of owing money to creditors who are seeking to recover the total amount owed.
*Some might feel a moral obligation, but that’s not really something I can help with, as your attorney. Maybe ask a therapist?
**The injunction against collection that happens as soon as you file your petition. You can read more about it in other posts.