What is a bankruptcy discharge and how does it operate?
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:
1. Most taxes;
2. Child support;
4. Most student loans;
5. Court fines and criminal restitution; and
6. Personal injury caused by driving drunk or under the influence of drugs.
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. 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. Also, if you have credit card debt, you should discontinue use of the card(s) prior to filing. Some courts have denied the discharge of credit card debt if the debtor has not made at least three payments since the last use.
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.
You can only receive a Chapter 7 discharge once every eight years. 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 or any other kind of document to do this.
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. You can keep your secured items if the Judge finds it is in your best interests and you sign a Reaffirmation Agreement.
- What is a Reaffirmation Agreement?
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 must be voluntary; must not place too heavy a burden on you or your family; must be in your best interest; and can be canceled any time before the Court issues your discharge or within 60 days after the agreement is filed with the Court, whichever gives you the most time.
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.
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.
- Exempt Property
The Bankruptcy Court can take money or property from you to repay your creditors if you have more than is allowed by law. You are, however, allowed to keep a certain amount of property. These allowances are called exemptions, and they apply to both Chapter 7 and Chapter 13 Bankruptcies. As a debtor, you are allowed to keep the following real and personal property owned by you:
A. The necessary wearing apparel, bible, school books, and family pictures of the debtor and the debtor’s dependents:
B. The debtor’s equity interest, not to exceed $15,000.00 if single, $30,000.00 if married, in the debtor’s home.
C. The debtor’s equity interest, not to exceed $4,000.00 in value, in any other property;
D. The debtor’s equity interest, not to exceed $2,400.00 in value, in any one motor vehicle;
E. The debtor’s equity interest, not to exceed $1,500.00 in value, in any implements, professional books, or tools of the trade of the debtor;
F. Professionally prescribed health aids for the debtor or a dependent of the debtor:
G. All proceeds payable because of the death of the insured and the aggregate net cash value of any or all life insurance and endowment polices and annuity contracts payable to wife or husband of the insured, or to a child, parent, or other person dependent upon the insured, whether the power to change the beneficiary is reserved to the insured or not and whether the insured or the insured’s estate is a contingent beneficiary or not;
H. The debtor’s right to receive:
1. A social security benefit, unemployment compensation, or public assistance;
2. A veteran’s benefit;
3. A disability, illness or unemployment benefit; and
4. Alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.
I. The debtor’s right to receive, or property that is traceable to:
1. An award under a crime victim’s reparation law;
2. A payment on account of the wrongful death of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor;
3. A payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor or a dependent of the debtor;
4. A payment, not to exceed $15,00.00 in value, on account of personal bodily injury of the debtor or an individual of whom the debtor was a dependent; and
5. Any restitution payments made to persons pursuant to the federal Civil Liberties Act of 1988 and the Aleutian and Pribilof Island Restitution Act.
If you file with your spouse, you both get the exemptions listed above. Most retirement plans are exempt from collection.
If you desire further information on the Federal Bankruptcy Code, please e-mail me or contact me by phone at (217)422-2280.