What are the differences between Chapter 7, 11, 12 & 13, and what are the
qualifications for each?
Once I file
can I change from one chapter to another?
How long will
a bankruptcy affect my credit record?
What Is a
Bankruptcy Discharge and How Does It Operate?
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One of the reasons people file bankruptcy is to get a “discharge.” A discharge
is a court order which states that you do not have to pay most of your debts.
Some debts cannot be discharged. For example, you cannot discharge debts for–
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The discharge only applies to debts that arose before the date you filed. Also,
if the judge finds that you received money or property by fraud, that debt may
not be discharged.
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It is important to list all your property and debts in your bankruptcy
schedules. If you do not list a debt, for example, it is possible the debt will
not be discharged. The judge can also deny your discharge if you do something
dishonest in connection with your bankruptcy case, such as destroy or hide
property, falsify records, or lie, or if you disobey a court order.
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You can only receive a chapter 7 discharge once every eight years. Other rules
may apply if you previously received a discharge in a chapter 13 case. No one
can make you pay a debt that has been discharged, but you can voluntarily pay
any debt you wish to pay. You do not have to sign a reaffirmation agreement (see
below) or any other kind of document to do this.
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Some creditors hold a secured claim (for example, the bank that holds the
mortgage on your house or the loan company that has a lien on your car). You do
not have to pay a secured claim if the debt is discharged, but the creditor can
still take the property.
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What Is a
Reaffirmation Agreement?
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Even if a debt can be discharged, you may have special reasons why you want to
promise to pay it. For example, you may want to work out a plan with the bank to
keep your car. To promise to pay that debt, you must sign and file a
reaffirmation agreement with the court. Reaffirmation agreements are under
special rules and are voluntary. They are not required by bankruptcy law or by
any other law. Reaffirmation agreements–
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must be voluntary;
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must not place too heavy a burden on you or your family;
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must be in your best interest; and
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can be canceled anytime before the court issues your discharge or within 60 days
after the agreement is filed with the court, whichever gives you the most time.
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If you are an individual and you are not represented by an attorney, the court
must hold a hearing to decide whether to approve the reaffirmation agreement.
The agreement will not be legally binding until the court approves it.
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If you reaffirm a debt and then fail to pay it, you owe the debt the same as
though there was no bankruptcy. The debt will not be discharged and the creditor
can take action to recover any property on which it has a lien or mortgage. The
creditor can also take legal action to recover a judgment against you.
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WHAT IS A
DISCHARGE IN BANKRUPTCY?
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A bankruptcy discharge releases the debtor from personal liability for certain
specifiedtypes 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 of the debtor 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.
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Although a debtor is not personally liable for discharged debts, a valid lien
(i.e., a charge upon specific property to secure payment of a debt) that has not
been avoided (i.e., made unenforceable) in the bankruptcy case will remain after
the bankruptcy case. Therefore, a secured creditor may enforce the lien to
recover the property secured by the lien.
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WHEN DOES THE
DISCHARGE OCCUR?
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The timing of the discharge varies, depending on the chapter under which the
case is filed. In a chapter 7 (liquidation) case, for example, the court usually
grants the discharge promptly on expiration of the time fixed for filing a
complaint objecting to discharge and the time fixed for filing a motion to
dismiss the case for substantial abuse (60 days following the first date set for
the 341 meeting). Typically, this occurs about four months after the date the
debtor files the petition with the clerk of the bankruptcy court. In individual
chapter 11 cases, and in cases under chapter 12 (adjustment of debts of a family
farmer or fisherman) and 13 (adjustment of debts of an individual with regular
income), the court generally grants the discharge as soon as practicable after
the debtor completes all payments under the plan. Since a chapter 12 or 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. The court
may deny an individual debtor’s discharge in a chapter 7 or 13 case if the
debtor fails to complete “an instructional course concerning financial
management.” The Bankruptcy Code provides limited exceptions to the “financial
management” requirement if the U.S. trustee or bankruptcy administrator
determines there are inadequate educational programs available, or if the debtor
is disabled or incapacitated or on active military duty in a combat zone.
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HOW DOES
THE DEBTOR GET A DISCHARGE?
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Unless there is litigation involving objections to the discharge, the debtor
will usually automatically receive a discharge. The Federal Rules of Bankruptcy
Procedure provide for the clerk of the bankruptcy court to mail a copy of the
order of discharge to all creditors, the U.S. trustee, the trustee in the case,
and the trustee’s attorney, if any. The debtor and the debtor’s attorney also
receive copies of the discharge order. The notice, which is simply a copy of the
final order of discharge, is not specific as to those debts determined by the
court to be non-dischargeable, i.e., not covered by the discharge. The notice
informs creditors generally that the debts owed to them have been discharged and
that they should not attempt any further collection. They are cautioned in the
notice that continuing collection efforts could subject them to punishment for
contempt. Any inadvertent failure on the part of the clerk to send the debtor or
any creditor a copy of the discharge order promptly within the time required by
the rules does not affect the validity of the order granting the discharge.
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ARE ALL OF
THE DEBTOR’S DEBTS DISCHARGED OR ONLY SOME?
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Not all debts are discharged. The debts discharged vary under each chapter of
the Bankruptcy Code. Section 523(a) of the Code specifically excepts various
categories of debts from the discharge granted to individual debtors. Therefore,
the debtor must still repay those debts after bankruptcy. Congress has
determined that these types of debts are not dischargeable for public policy
reasons (based either on the nature of the debt or the fact that the debts were
incurred due to improper behavior of the debtor, such as the debtor’s drunken
driving).
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There are 19 categories of debt excepted from discharge under chapters 7, 11,
and 12. A more limited list of exceptions applies to cases under chapter 13.
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Generally speaking, the exceptions to discharge apply automatically if the
language prescribed by section 523(a) applies. The most common types of
nondischargeable debts are certain types of tax claims, debts not set forth by
the debtor on the lists and schedules the debtor must file with the court, debts
for spousal or child support or alimony, debts for willful and malicious
injuries to person or property, debts to governmental units for fines and
penalties, debts for most government funded or guaranteed educational loans or
benefit overpayments, debts for personal injury caused by the debtor’s operation
of a motor vehicle while intoxicated, debts owed to certain tax advantaged
retirement plans, and debts for certain condominium or cooperative housing fees.
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The types of debts described in sections 523(a)(2), (4) and(6) (obligations
affected by fraud or maliciousness) are not automatically excepted from
discharge. Creditors must ask the court to determine that these debts are
excepted from discharge. In the absence of an affirmative request by the
creditor and the granting of the request by the court, the types of debts set
out in sections 523(a)(2), (4) and (6) will be discharged.
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A slightly broader discharge of debts is available to a debtor in a chapter 13
case than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in
chapter 7, include debts for willful and malicious injury to property, debts
incurred to pay non-dischargeable tax obligations, and debts arising from
property settlements in divorce or separation proceedings. Although a chapter 13
debtor generally receives a discharge only after completing all payments
required by the court-approved (i.e., “confirmed”) repayment plan, there are
some limited circumstances under which the debtor may request the court to grant
a “hardship discharge” even though the debtor has failed to complete plan
payments. Such a discharge is available only to a debtor whose failure to
complete plan payments is due to circumstances beyond the debtor’s control. The
scope of a chapter 13 “hardship discharge” is similar to that in a chapter 7
case with regard to the types of debts that are excepted from the discharge. A
hardship discharge also is available in chapter 12 if the failure to complete
plan payments is due to “circumstances for which the debtor should not justly be
held accountable.”
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DOES THE DEBTOR HAVE THE RIGHT TO A DISCHARGE OR CAN CREDITORS OBJECT TO THE
DISCHARGE?
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In chapter 7 cases, the debtor does not have an absolute right to a discharge.
An objection to the debtor’s discharge may be filed by a creditor, by the
trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly
after the case is filed that sets forth much important information, including
the deadline for objecting to the discharge. To object to the debtor’s
discharge, a creditor must file a complaint in the bankruptcy court before the
deadline set out in the notice. Filing a complaint starts a lawsuit referred to
in bankruptcy as an “adversary proceeding.”
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The court may deny a chapter 7 discharge for any of the reasons described in
section 727(a) of the Bankruptcy Code, including failure to provide requested
tax documents; failure to complete a course on personal financial management;
transfer or concealment of property with intent to hinder, delay, or defraud
creditors; destruction or concealment of books or records; perjury and other
fraudulent acts; failure to account for the loss of assets; violation of a court
order or an earlier discharge in an earlier case commenced within certain time
frames (discussed below) before the date the petition was filed. If the issue of
the debtor’s right to a discharge goes to trial, the objecting party has the
burden of proving all the facts essential to the objection.
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In chapter 12 and chapter 13 cases, the debtor is usually entitled to a
discharge upon completion of all payments under the plan. As in chapter 7,
however, discharge may not occur in chapter 13 if the debtor fails to complete a
required course on personal financial management. A debtor is also ineligible
for a discharge in chapter 13 if he or she received a prior discharge in another
case commenced within time frames discussed the next paragraph. Unlike chapter
7, creditors do not have standing to object to the discharge of a chapter 12 or
chapter 13 debtor. Creditors can object to confirmation of the repayment plan,
but cannot object to the discharge if the debtor has completed making plan
payments.
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CAN A DEBTOR RECEIVE A SECOND DISCHARGE IN A LATER CHAPTER 7 CASE?
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The court will deny a discharge in a later chapter 7 case if the debtor received
a discharge under chapter 7 or chapter 11 in a case filed within eight years
before the second petition is filed. The court will also deny a chapter 7
discharge if the debtor previously received a discharge in a chapter 12 or
chapter 13 case filed within six years before the date of the filing of the
second case unless (1) the debtor paid all “allowed unsecured” claims in the
earlier case in full, or (2) the debtor made payments under the plan in the
earlier case totaling at least 70 percent of the allowed unsecured claims and
the debtor’s plan was proposed in good faith and the payments represented the
debtor’s best effort. A debtor is ineligible for discharge under chapter 13 if
he or she received a prior discharge in a chapter 7, 11, or 12 case filed four
years before the current case or in a chapter 13 case filed two years before the
current case.
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CAN THE
DISCHARGE BE REVOKED?
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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. Typically, a request to revoke
the debtor’s discharge must be filed within one year of the discharge or, in
some cases, before the date that the case is closed. The court will decide
whether such allegations are true and, if so, whether to revoke the discharge.
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In a chapter 11, 12 and 13 cases, if confirmation of a plan or the discharge is
obtained through fraud, the court can revoke the order of confirmation or
discharge.
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MAY THE DEBTOR PAY A DISCHARGED DEBT AFTER THE BANKRUPTCY CASE HAS BEEN
CONCLUDED?
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A debtor who has received a discharge may voluntarily repay any discharged debt.
A debtor may repay a discharged debt even though it can no longer be legally
enforced. Sometimes a debtor agrees to repay a debt because it is owed to a
family member or because it represents an obligation to an individual for whom
the debtor’s reputation is important, such as a family doctor.
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WHAT CAN THE DEBTOR DO IF A CREDITOR ATTEMPTS TO COLLECT A DISCHARGED DEBT
AFTER THE CASE IS CONCLUDED?
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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.
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CAN AN EMPLOYER TERMINATE A DEBTOR’S EMPLOYMENT SOLELY BECAUSE THE PERSON
WAS A DEBTOR OR FAILED TO PAY A DISCHARGED DEBT?
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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.
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DIVIDING THE DEBTS IN
A DIVORCE
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Information comes from
www.legalvoice.org.
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Under Washington law, the court which enters a decree in a
dissolution (divorce) proceeding must fairly divide the debts between
the parties. If the parties can agree on how the debts should be
divided, they may ask the court to approve the agreed division. If the
parties cannot agree,
they may ask a court or other person (mediator, arbitrator, etc.) to
divide the debts.
Regardless of whether the debt division is agreed or not, a court is
required to follow some rules when dividing debts:
1) Separate debts should be the responsibility of the spouse who
incurred the debt;
2) Community debts should be divided fairly and equitably between the
parties;
3) The whole dissolution (debts, assets, etc.) must be fair and
equitable to each party.
The court will generally approve an agreed division of the debts unless
it is very unfair to one party. The first rule above is important
because a spouse should not be asked to bear a much greater portion of
community debt just because the other has large separate debts to pay.
The
third rule above is important because a court will generally look to
asset division as a measure of how fair the debt division is.
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The
Effect of the Debt Division on Creditors
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Information comes from
www.legalvoice.org.
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This point cannot be stressed enough:
No matter who is ordered to pay a community debt in a dissolution or
separation proceeding (even if agreed by the parties) both parties are
still liable to the creditor for the community debt. In other words, if
your ex-spouse fails to pay the debts he or she was ordered to pay in
the dissolution, the creditor can come after you and the creditor is not
required to cease collection just because of the dissolution decree.
This may seem harsh, but actually makes sense if you think about it this
way: Let’s say you lend $100 to your cousins Abe and Ben, who are
starting a business. Each signs a written note, to you, to be liable for
the full $100. You lend it to them because although each cousin alone is
less than totally reliable, each should be good for about $50. After a
couple of months, Ben decides to leave the business. Abe proposes that
he keep all the assets of the business, and all of the debts (including
the loan to you). Ben agrees. You then go to collect on your note from
Ben, to which he replies: “I am no longer liable to pay you – Abe and I
agreed he would take the debt.” The actual collectability of your $100
has just been cut in half by a contract which you had no part of! This
example shows why it is not possible to modify the rights of a creditor
by virtue of the dissolution decree. Like Ben, the divorcing parties
cannot modify the rights of creditors by their agreement with each
other.
This does not mean that the decree is worthless, however. If your
ex-spouse fails to pay and you are forced to, you can sue for damages
and contempt of the decree.
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Bankruptcy Issues regarding ex spouses
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Information comes from
www.legalvoice.org.
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Perhaps your ex-spouse was
assigned several debts in the divorce, and you have just received notice
that he or she is filing for bankruptcy. Are you now liable for all
those debts? Perhaps you received several debts in a divorce and are
considering filing for bankruptcy. Can you
discharge these debts in the bankruptcy? Perhaps you and your spouse
want to draft an agreed order dividing the debts, but you want to be
sure to protect yourself if the other ever files bankruptcy. Perhaps the
divorce has left you both financially depleted and you both know you
will have to file a bankruptcy. Is it better to file now, before the
divorce is over, or after? It is almost always best to consult an
attorney in these matters. A little pre-divorce planning in this area
may save you a lot of headache in the long run. Some general principles
to use if you decide to try it yourself are:
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The general rule is that
community debts taken in connection with a dissolution decree are
not dischargeable in bankruptcy unless: a) the debtor absolutely
cannot pay because all his or her money is needed for the basics of
survival; or b) the benefit to the bankruptcy debtor outweighs the
detrimental consequences on the ex-spouse.
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Some debts that are normally
dischargeable in bankruptcy can become non-dischargeable if they are
included within a dissolution decree. For example, a single person
may have a credit card debt which is discharged in bankruptcy, but a
formerly married person who took the same type of debt may be
obligated to repay it if it was included in a dissolution decree
(subject to #1, above);
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The time period that you have
to object in a bankruptcy proceeding is very short (about 60 days
after the first meeting of creditors). If you feel as though your
ex-spouse is trying to get out of a debt he or she should be forced
to pay, you must file an objection in the allotted time period or
the discharge will be effective against the debt, whether you have a
great case or not. Do not wait too long or you may be stuck with all
the debts, regardless of how unfair it may be!
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You can be physically
separated and still file a joint bankruptcy petition. Joint
petitions are generally cleaner and cheaper than two separate
bankruptcies. If you can both agree that filing bankruptcy is the
way to go, you don’t have to still be married and under the same
roof to file at the same time. Filing before the divorce is final
may also be advantageous, but you should consult an attorney on that
particular issue.
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Filing for bankruptcy does not
change the child support which has already been ordered by the
court; it also does not generally change spousal maintenance
obligations. Once a bankruptcy petition is filed, the court handling
the divorce cannot change or modify child support or maintenance
payments unless the Bankruptcy Court specifically permits
modification proceedings.
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Avoiding Common
Mistakes
