Thursday, June 25, 2015

What Does a Discharge Really Do?

An attorney should be able to explain to a client or potential client how bankruptcy works and what certain legal terms mean. Bankruptcy can be complicated and hard to understand, even for an attorney. So, it is not unusual that certain terms or concepts are simplified so that a person can have a better understanding of what going through bankruptcy means for them.

A discharge is one of the main purposes or goals of filing a bankruptcy. So, discharge is a word that bankruptcy attorneys use constantly and is a term that is often oversimplified. As a result, many debtors or potential debtors believe that a discharge extinguishes a creditor's claim. While a discharge does extinguish a creditor's claim to some extent, it is not accurate to say that the creditor's claim is extinguished. When a debtor receives a discharge, their personal liability for debt is being extinguished (assuming the debt is dischargeable). That means that the creditor's claim may survive in some form and may be enforceable in some way other than collecting against the debtor personally.

Secured Debt

When a person receives a discharge they are extinguishing their personal liability for debt. It is important to understand what happens when debt is secured by property, such as a home or car. If a person continues to make payments on secured debt either according to the applicable contractual terms or through a Chapter 13 plan, there is rarely any issue with keeping the property. However, if payments cease, necessary reaffirmation agreements are not signed, and/or the property is declared surrendered, the creditor can collect against the property that secures their claim. For example, when a debtor files Chapter 7 they discharge their liability on a home mortgage (unless a reaffirmation agreement is executed).  Discharging the debtor's personal liability on a home mortgage does not mean the mortgage company can't collect against the home that secures their claim. So, if a debtor is surrendering a home through the bankruptcy or they fail to pay the home mortgage and the debt is not reaffirmed, the mortgage company can't collect against the debtor personally, but they can foreclose on the property.  In other words, the debtor's personal liability is extinguished, but the creditor's claim still exists and can be enforced against the home itself.

Joint Debt - Codebtors/Cosigners

Understanding what a discharge does is also very important when there is codebtor or cosigner on a debt. Again, when a person receives a discharge they are extinguishing their personal liability for debt (assuming the debt is dischargeable). If someone else is liable for a debt, that person will remain liable after the debtor receives their discharge. For example, a father cosigns on an auto loan for his son. The son files Chapter 7 and surrenders the auto. Upon receiving a discharge, the son will no longer be personally liable for the auto loan. However, the father will remain liable on the entire balanced owed. The creditor can collect on their claim by repossessing the vehicle and collecting personally against the father for any unpaid balance.

The Bottom Line

An individual can obtain a discharge by filing Chapter 7 or Chapter 13 bankruptcy. Some debts are non-dischargeable in Chapter 7 and Chapter 13. Some debts are non-dischargeable only in Chapter 7.
Most bankruptcy attorneys, myself included, offer free consultations. By consulting with an experienced bankruptcy attorney, you can determine what your options are, how Chapter 7 or Chapter 13 can help you, and what obtaining a discharge would mean for you. A bankruptcy discharge can provide incredible relief. Make sure you understand your options so that you can choose the right course of action.

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This website is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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