Bankruptcy discharge is a frightening process, but for all the negative connotations around that term, bankruptcy often provides individuals and businesses with a fresh financial start. Perhaps the best aspect of bankruptcy is the discharge, a court order freeing the debtor from personal liability for some debts. It is well worth knowing what a bankruptcy discharge is, how it works, and what creditors and debtors should know about its impact.

What is a Bankruptcy Discharge?

A discharge in bankruptcy is a court order freeing the debtor from legal obligation to pay specific debts. A discharged debt can never again be collected by a creditor in any manner. That is no calls, no letters, no lawsuits, or collection of any sort. The discharge is one of the valuable benefits of bankruptcy, giving debtors a chance to begin a fresh debt-free life.

But not all debt is dischargeable. Secured debt such as a car or house is collateralized by some asset. The debtor must pay if the objective is to keep the asset. Otherwise, the creditor can repossess or foreclose on the asset, even in bankruptcy.

When Does the Discharge Occur?

Any timing of a bankruptcy discharge is predicated on the chapter in which the case is filed:

Chapter 7 (Liquidation): In Chapter 7 bankruptcy, the discharge is usually issued around four months after the bankruptcy petition has been filed. This comes after the debtor has attended the 341 meeting of creditors and fulfilled all the conditions, such as attending a financial management course.

Chapter 13 (Repayment Plan): Chapter 13 bankruptcy discharge is only granted after the debtor has paid all the payments as per the accepted court repayment plan, normally three or five years. A hardship discharge may be achieved if the debtor is not able to fulfill the plan because of unforeseen circumstances that are beyond their control.

Chapter 11 and Chapter 12: Both are utilized by family farmers and businesses and provide discharges at the close of reorganization or the repayment plan. Discharge normally occurs automatically except where there is an objection from creditors or the trustee. The creditors and other individuals are notified about the discharge order by the bankruptcy court.

The decree is a warning to deter them from pursuing discharged debts. When a creditor initiates another pursuit of collection, the debtor will make it known to the court in a violation where the court may impose on the creditor a penalty in the form of fines in contempt of court. The discharge order doesn’t specify which debts are discharged.

Instead, it is a general notice to creditors that they can’t proceed and collect on the debts. Debtors should make a copy of the discharge order and use it if a creditor attempts to collect on a discharged debt.

Which Debts Are Dischargeable?

Not all debt is eliminated by bankruptcy. The Bankruptcy Code specifies special exceptions that vary depending on the chapter under which the case is filed.

Nondischargeable debt most commonly includes:

Tax Claims: Income taxes for relatively recent years typically are not discharged.

Child Support and Alimony: Obligations of family support outlast bankruptcy.

Student Loans: Most student loans insured or guaranteed by the government are nondischargeable except where the debtor can show undue hardship.

Debts for Willful or Malicious Injury: Debts for willful or malicious injury to other persons or property are generally not discharged.

Fines and Penalties: Fines and penalties due to government agencies are generally non-dischargeable.

Under Chapter 13, the discharge is broader than under Chapter 7 and allows certain of the debts otherwise not dischargeable to be discharged in the plan of repayment.

Can Creditors Object to the Discharge?

In Chapter 7 cases, creditors, the trustee, or the U.S. Trustee may object to the discharge of the debtor. Fraud, hiding assets, or failure to obey court orders are typical reasons for objection. In case the objection is successful with the court, the debtor may lose the ability to discharge in full.

Under Chapter 13, the creditors cannot object to discharge as such, but they can object to confirmation of the plan of repayment. Once the plan is confirmed and administered, discharge is usually granted.

Is a Discharge Revocable?

Discharge may be revoked under rare circumstances. It is typically done if the debtor obtained the discharge through fraud, concealment of assets, or other wrongdoing. Petition to revoke discharge must be presented within a year after the date of the discharge or before the case is closed, whichever is later.

What Happens After the Discharge?

Once a debt is discharged, the debtor legally owes nothing. However, out of their own free will, some debtors pay debts, which have been discharged, usually out of personal or moral obligation, such as to friends and family. If the creditor attempts collection on the debt discharged, the debtor may bring the bankruptcy court for an order enforcing the discharge. The court can re-open the case to correct the violation and sanction the creditor.

Protections for Debtors After Bankruptcy

The Bankruptcy Code also contains provisions for anti-discrimination protection for individuals with bankruptcy cases. Employers, government agencies, and other organizations cannot terminate an individual from employment, cancel a license, or otherwise penalize an individual because he or she had filed bankruptcy or failed to pay a debt that was discharged.

Getting a Copy of the Discharge Order

In case the debtor loses the discharge order, the debtor may request the bankruptcy clerk to obtain a copy. It might cost them some fees for record search, copying, and document certification.

Most of the courts also have computer access to the case files through different services, though with per-page fees that must be paid by the users. A discharge in bankruptcy is a potent instrument that grants debtors a second chance.

Nevertheless, it is important to understand its breadth, limitations, and the liabilities it entails. Debtors can utilize the procedure to their optimal financial advantage through the services of an experienced bankruptcy attorney. To creditors, respect for the order of discharge is essential not to incur legal penalties and ensure conformity with bankruptcy codes.

If you’re struggling with a massive amount of debt, Chapter 7 bankruptcy could be a way to reduce or eliminate it and help you get back to normal life. There’s no minimum amount specified in federal bankruptcy law, but bankruptcy should be considered a last resort when all other means to pay back the debt fall short; this process has severe financial and credit consequences that take years to recover from, but it is nevertheless an option for those with no others left.

Chapter 7 Filing Eligibility

Even though there isn’t a federally-specified minimum amount of debt that Chapter 7 filers must meet, there are other eligibility requirements to be mindful of.

In all cases, prospective filers must pass a means test to determine if they are eligible to proceed. Rather than how much debt you have, your income is the key metric; if you make less than the income limits, you can file for Chapter 7 bankruptcy. Otherwise, you’ll need to take a second means test, the metrics for which are a bit more complicated.

You must also complete a credit counseling course before you file, as well as a financial management course before your debt can be discharged, effectively erasing all the debts that qualify under a Chapter 7 case. Note that you may also only file for bankruptcy once every eight years.

If you’re unable to pass either means case, you can instead file for Chapter 13 bankruptcy.

Chapter 7 vs. Chapter 13

These two chapters handle debts differently, so the process itself varies as well. Chapter 7 is better for individuals struggling with mountains of unsecured debts, such as medical bills or credit card bills. As long as you meet and complete the requirements, it takes about four to six months to fully discharge those debts.

With Chapter 13, your debts are instead reorganized so that you make monthly payments to your creditors over three to five years, which means this form of bankruptcy naturally takes much longer. Still, it may be preferable for those with secured debts or property that they don’t want to lose. To qualify, you must have enough disposable income to make the payments for the entire plan.

Another important difference is that there isn’t a limit to how much debt you can discharge under Chapter 7, which isn’t the case for Chapter 13. Its debt limits are updated every three years; most recently, Chapter 13 limits were updated in April 2022 to $465,275 for unsecured debt or $1,395,975 for secured debt.

Will Your Debts Qualify?

Most filers’ debts are unsecured, which means they don’t have any collateral locked down to secure repayment. This is generally the case for lines of credit, credit cards, and personal loans. These types of debt permanently discharge under Chapter 7 bankruptcy, so it’s potentially a great source of relief for those who don’t have other kinds of debt.

Remember, federal bankruptcy law doesn’t specify a minimum or maximum on unsecured debt that can be discharged under this chapter. In fact, the amount of debt you have isn’t part of the means test at all; only your income is.

However, if you have secured debts like a mortgage or a car loan, you won’t be able to discharge those and keep the property under this chapter. This property is a means of securing repayment of the debt, so in order to keep it, you either need to keep paying the debt as promised before, during, and after a bankruptcy case.

Alternatives to Bankruptcy

It’s easy to feel trapped when you’re under a lot of debt, but the good news is that you have several options to consider before bankruptcy:

• Debt management: In a debt management plan, a credit counseling agency works with your creditors to negotiate a payment plan that you can afford. It only works with unsecured debts.
• Debt consolidation: With debt consolidation, an agency combines multiple debts into a single obligation to think about. This is common for those who have multiple student loans to simplify repayment, but you can also consolidate credit card debt and other kinds of loans.
• Debt settlement: You can sometimes settle your debt for less than what you owe by offering a lump-sum payment. This usually only works for credit cards and similar unsecured debts.

Think about how much debt you have, interest rates, and how long it would take to repay when you consider each of these options. Sometimes you won’t ever be able to repay a debt on your own without some help, but you can nevertheless try to become debt-free.

If you’re stuck under an insurmountable amount of debt with no other options left, Chapter 7 bankruptcy may be the next step for you. Remember, federal law doesn’t limit the amount of debt you can discharge in this chapter. Consider consulting with a bankruptcy attorney or credit counselor to discuss your questions.

In times of financial distress, bankruptcy can help people regain control of their finances. However, you should know that not all debts can be discharged in bankruptcy proceedings. This guide examines the debts exempt from bankruptcy under Chapters 7 and 13, shedding light on the limitations and nuances of each chapter.

I. Chapter 7 Bankruptcy: A Fresh Start through Liquidation

Chapter 7 bankruptcy is a legal process that allows people to rebuild their lives by liquidating non-exempt assets to repay creditors. Also known as “liquidation bankruptcy” because the debtor’s non-exempt assets are sold, and the proceeds are divided among the creditors. This chapter of bankruptcy benefits many debtors by allowing them to eliminate their overwhelming debts and regain financial stability.

However, it is important to note that not all debts are discharged through Chapter 7 bankruptcy. Certain debts are typically exempted from discharge, meaning that the debtor remains responsible for repaying them even after the bankruptcy process is completed. These non-dischargeable debts are carefully defined by bankruptcy laws to protect creditors’ rights and maintain fairness in the overall process.

Student Loans
A student loan is one of the debts, generally non-dischargeable under Chapter 7 bankruptcy. Student loans are often substantial and can create a significant financial burden for individuals. Unfortunately, discharging student loans through bankruptcy is challenging and requires proving an “undue hardship.” This standard is very stringent and typically requires demonstrating that repaying student loans would cause extreme financial hardship that persists over an extended period.

Child Support and Alimony
Debts related to child support and alimony obligations are also non-dischargeable. These debts hold priority status, ensuring that children and former spouses receive the necessary financial support.

Taxes
Most tax debts are not dischargeable under Chapter 7 bankruptcy. This includes income taxes, property taxes, and certain other tax-related obligations. The rationale behind this exemption is to maintain the tax system’s integrity and prevent individuals from using bankruptcy to avoid their tax responsibilities. However, there are exceptions to this rule based on specific circumstances, such as the age of the tax debt and compliance with tax filing requirements.

Debts Incurred through Fraud or Misrepresentation
Debts that result from fraudulent activities, embezzlement, or pretences are generally non-dischargeable in bankruptcy. This provision ensures that individuals cannot abuse the bankruptcy process to avoid debts obtained through dishonest or deceptive practices. Bankruptcy laws aim to uphold the principles of fairness and prevent the misuse of the system.

II.A Repayment Plan for Financial Rehabilitation

Chapter 13 bankruptcy, a “repayment plan” or “wage earner’s plan,” offers people a structured path to financial recovery. Unlike Chapter 7 bankruptcy, which involves liquidating assets, this chapter allows debtors to create a realistic repayment plan over three to five years to pay off their debts.

This form of bankruptcy is often suitable for individuals who have a steady income and want to retain their assets while repaying their debts in an organized manner. It provides more flexibility compared to Chapter 7, allowing debtors to keep their homes and other valuable possessions while addressing their financial obligations responsibly.

However, it is important to note that certain debts are still considered non-dischargeable under Chapter 13 bankruptcy. This means that even with the repayment plan, the debtor remains responsible for these obligations. Let’s explore these non-dischargeable debts to gain a deeper understanding:

Debts from Willful and Malicious Injury
Chapter 13 bankruptcy does not discharge debts resulting from intentional acts of harm or property damage. This provision ensures that individuals who have caused harm to others through willful and malicious actions remain accountable for their actions. Victims have the right to seek compensation for their injuries or damages.

Certain Tax Debts
While Chapter 13 bankruptcy allows for the inclusion of certain tax debts in the repayment plan, not all tax obligations can be discharged. Recent income taxes, for instance, typically must be paid in full. However, older tax debts or tax penalties may be eligible for inclusion in the repayment plan, allowing debtors to gradually catch up on these obligations.

Debts Not Listed in the Bankruptcy Filing
Debtors must list all their debts in the bankruptcy filing accurately. Failure to disclose a debt can result in it being excluded from the discharge. It is essential to be diligent and thorough in providing a comprehensive account of all debts to ensure a fair resolution for the debtor and the creditors.

Debts Arising After Filing
Debts incurred after the bankruptcy petition has been filed are generally not dischargeable. Debtors must be responsible for managing any new debts or financial obligations that arise during the bankruptcy process. This underscores the importance of prudent financial management and avoiding new debts while undergoing bankruptcy proceedings.

Individuals filing for Chapter 13 bankruptcy can gradually reorganize their finances and repay their debts. Debtors can demonstrate their commitment to financial responsibility and work toward a fresh start by following the structured repayment plan. Seeking the advice of a qualified bankruptcy attorney is critical to successfully navigating the complexities of Chapter 13 bankruptcy.

Understanding which debts are exempt from filing for bankruptcy is crucial for individuals considering Chapter 7 or Chapter 13 bankruptcy. While bankruptcy can relieve certain debts, consulting with a qualified bankruptcy attorney is important to navigate the complex legal requirements.

Chapter 7 bankruptcy offers a fresh start by liquidating non-exempt assets, but student loans, child support, alimony, taxes, and debts resulting from fraud or misrepresentation remain non-dischargeable. In contrast, Chapter 13 bankruptcy provides a repayment plan over a period. Still, debts from willful injury, certain tax, unlisted, and post-petition debts are not dischargeable.

Navigating the bankruptcy process requires careful consideration of individual circumstances and a thorough understanding of the applicable laws. Seeking professional legal advice is advisable to assess the specific situation and make informed decisions accurately.

Bankruptcy laws may vary across jurisdictions, so you must be familiar with the regulations in your area. By obtaining the necessary knowledge and guidance, individuals can work towards financial rehabilitation and establish a solid foundation for their future.

Many Americans are in debt. That’s the conclusion reached in multiple studies, including one from Motley Fool, a private financial and investing advice company based in Alexandria, Virginia. It revealed the average household debt was reportedly $101,915 as of the end of 2022 and that American households collectively carry over $17 trillion in debt as of the second quarter of 2023. While that is alarming, there is some good news insofar as most Americans recognize how much debt they carry and are slowly trying to dig themselves out of that debt. As of the writing of this article, the debt payment-to-income ratio is around 9.6% in America.

For those who might not know what that means, the average American spends over 9% of their monthly income on debt payments. For most people, that is manageable and does not markedly disrupt their lives. However, for others, it can mean the difference between being able to put food on the table and not being able to put food on the table. When debt becomes too much to handle, many families file for bankruptcy.

How To Decide Between Filing Chapter 7 and Chapter 13 Bankruptcy

Both Chapter 7 and Chapter 13 will negatively impact an individual’s credit; the difference comes down to how long each will remain on their credit report. According to Bankrate, a consumer financial services company in New York City, Chapter 7 bankruptcy, which erases most unsecured debts, such as medical bills, credit card debt, and personal loans, remains on an individual’s credit report for seven years. Chapter 13 bankruptcy, meanwhile, which allows individuals to keep their property and repay debts over time, typically 3 to 5 years, stays on their credit report for seven years. While Chapter 7 bankruptcy sounds like the more appealing of the two since it erases one’s unsecured debts, it only benefits low-income households. High-income households will have to go with Chapter 13 bankruptcy instead.

Not All Debt Is Dischargeable Debt: The Truth About Filing Bankruptcy

While it would be nice to have all of our outstanding debt discharged or included in a structured repayment plan, some debts don’t qualify for either. And those debts are known as non-dischargeable debts. Having made that distinction, examples of dischargeable debts, also known as unsecured debts, include the following:

• Auto accident claims
• Business debts
• Collection accounts
• Credit card charges
• Most civil court judgments
• Unpaid rent payments and money owed under lease agreements
• Past-due utility balances
• Personal loans
• Repossession deficiency balances from auto loans
• Unpaid medical bills
• Unpaid taxes and related tax penalties

Now that we are up to speed on dischargeable debts, let’s discuss their non-dischargeable counterparts. According to Wisconsin bankruptcy attorneys, non-dischargeable debts, which are applicable when someone files Chapter 7 or Chapter 13 in Milwaukee or anywhere else in Wisconsin, include the following:

• Alimony and child support payments
• Debts incurred from death or personal injury resulting from a DUI
• Debts not previously included in an initial bankruptcy filing
• Debts resulting from the malicious injury to individual or property
• Tax liens

It is worth noting that the above list is not all-encompassing; many other things fall under the non-dischargeable umbrella when filing for bankruptcy in Wisconsin. To that point, it is best to speak with a Wisconsin bankruptcy attorney to determine what constitutes dischargeable and non-dischargeable based on the specifics of your bankruptcy case.

Are There Alternatives To Filing Bankruptcy?

Most Wisconsinites are mindful of how badly bankruptcy can destroy their credit, and most only choose this option as a last resort. That makes sense when you consider how many alternatives there are to resolving outstanding debt that doesn’t involve ruining one’s credit for years. Studies show people who have a bankruptcy on their credit are less likely to be approved for a mortgage, car loan, credit card, or personal loan than someone who does not. And if they are approved, they generally get loans with a much higher interest rate than someone who never filed for bankruptcy. That aside, some alternatives for resolving outstanding debt while keeping your credit intact include

Negotiating With Creditors

Going through the process of securing a judgment to collect an outstanding debt from a debtor is the last thing most creditors want to do. Most would prefer to negotiate a lower monthly payment or allow the debtor to pay off the debt for a fraction of what they owe. After all, both options keep creditors out of court and at their business where they can make money.

Debt Consolidation

If you owe a lot of debt to multiple creditors, debt consolidation is another alternative to bankruptcy worth considering. For those unfamiliar with debt consolidation, it entails taking out a personal loan or borrowing against your home’s equity and using that money to pay off the balance owed on high-interest credit cards and other loans. Generally speaking, debt consolidation is a good fit for individuals with debt payments that don’t exceed 50% of their gross monthly income. And that’s according to NerdWallet, a personal finance company that prides itself on helping clients make better and more informed financial decisions. It further notes that debt consolidation is ideal for individuals who have a credit score that allows them to secure a 0% or low-interest debt consolidation loan.

Debt Counseling

If you feel like you’re in over your head in debt, debt counseling could be the financial lifesaver that keeps your head above water. In short, debt consolidation entails seeking help from a certified nonprofit credit counseling agency to help you manage your outstanding debt. The way it works is these agencies review your income versus debt and day-to-day living expenses and help you figure out a budget and a plan for getting back on track financially. Sometimes, that might entail negotiating with your creditors to lower your monthly payments or agree to a lower payoff amount to resolve your outstanding debt on your behalf. Other times, they work with you to figure out a budget that will enable you to pay off your debt as quickly as possible.

In summary, debt is part of adulting. While some people can get out of debt under their own steam, doing so can be a far more challenging proposition for others. Often, those are the ones who have to ask for help, usually from debt collection companies, debt counseling agencies, and, as a last resort, a well-versed Chapter 7 or Chapter 13 Wisconsin bankruptcy attorney.