Last updated August 22, 2018.
Obstacles to Bankruptcy Discharge
Are you considering filing for bankruptcy? Bankruptcy can stop creditors from foreclosing on your home, repossessing your property, and suing you for past due payments. It can even stop debt collectors from contacting you.
Those are good things, but the biggest benefit of bankruptcy is that it wipes out your debt. Elimination of debt in bankruptcy is called the discharge. When your bankruptcy case is getting close to its conclusion, the court will send out formal notice to creditors that you don’t owe them any longer.
Once the discharge has issued, creditors who attempt to collect on debts included in the bankruptcy will be in violation of a federal court order. Bottom line: if they try to collect, there will be an angry federal judge to answer to.
But there are a few potential obstacles on the road to obtaining your discharge. Avoiding them can mean the difference between success and failure in the bankruptcy process.
The Bankruptcy Discharge Isn’t Guaranteed
The bankruptcy discharge is a powerful tool, but it’s not guaranteed.
There are many potential bumps in the road to discharge. First, any failure on your part to meet the legal requirements of bankruptcy can stall or prevent your discharge. You’ll need to seek credit counseling (and file proof that you have) with the court before you file.
You’ll need to take a personal finance course during your bankruptcy and file proof of that, too. You’ll have to cooperate with creditors and the trustee to provide the correct documents in a timely fashion. You’ll also need to pay all the required filing and court fees in full.
Under section 707 of the U.S. Bankruptcy Code, creditors, the bankruptcy trustee, and the court itself may move to dismiss your case if you don’t complete each of these steps.
The bankruptcy court may also deny your discharge under section 707 if you file under the wrong chapter. If you filed under Chapter 7 but could have made payments through a Chapter 13 plan, the court may convert your case. Under Chapter 13, you’ll have to repay your creditors more than you would through Chapter 7, but your remaining debt will still be discharged after you complete your five-year plan.
Denial of Discharge for Fraud
To this point, we’ve talked a good bit about technicalities that can threaten your discharge. A good attorney can steer you through these requirements. However, the biggest threat to discharge is not being truthful with the court. The number one rule of bankruptcy is full disclosure. Section 727 gives a long list of reasons a bankruptcy court will deny a discharge, and most center around a lack of transparency.
For example, transferring property out of your name prior to bankruptcy with the intent of hiding the assets from creditors will cause you to lose the right to your discharge. Similarly, destroying or failing to maintain documents that give the court a clear picture of your assets will prevent you from obtaining the relief you seek.
Similarly, either your creditors or your bankruptcy trustee may object to your discharge on substantive grounds. They may argue that you’ve acted in bad faith or that you’ve improperly exempted assets from liquidation. If creditors or the trustee object, the dispute will go before a bankruptcy judge. The judge will determine whether your discharge is proper or not.
If the judge finds that you’ve acted in bad faith, you may be denied discharge altogether. If not, the judge may grant your discharge in full or in part. An adversary proceeding will slow down the bankruptcy process and may result in the denial of all or part of your discharge.
As in most areas of life, in bankruptcy, honesty is the best–in fact, only–policy.
Reaffirmation of Debts – Choosing Not to Discharge Certain Debts
When you file for Chapter 7 bankruptcy, most of your debts are discharged, but you may choose to reaffirm certain debts. “Reaffirmation” means agreeing to continue to be bound by the terms of the debt during and after bankruptcy. You’ll keep the collateral and continue making payments.
If you choose to reaffirm a debt, the court will examine that reaffirmation and its terms. The judge wants to make sure you can actually make the required payments and won’t go through bankruptcy just to fall straight back into financial difficulties.
The Finish Line
So, if you follow all the rules, file in good faith, and your creditors and trustee don’t object, you can go straight to your discharge in as little as 60 days. If not, the process is going to take longer and probably cost you more. However, the discharge will be worth the price. When you receive your discharge, the court will send copies to all of your creditors. You’ll officially owe them nothing and you’ll be able to start anew.
If you think bankruptcy is right for you, speak to an experienced attorney. Your attorney help you avoid the obstacles and pitfalls and get your discharge as quickly and easily as possible.