What does it mean to bankrupt or discharge a debt?

Many people refer to getting rid of their debts in bankruptcy as "bankrupting" the debt. They often ask "can I bankrupt this debt?" That is incorrect terminology. The legal term for this is "discharge." What happens in bankruptcy (assuming you are successful) is that your legal obligation to pay on your debt will be discharged. Debts are never technically eliminated. They still exist after a bankruptcy, but you no longer have the legal obligation to pay on the ones that are discharged (or, bankrupted if you prefer).

What is the difference between a Chapter 7 and Chapter 13 bankruptcy?

Under a Chapter 7, after qualifying under a means test, there is no payout on any of your debt as it is discharged and the case usually completes in a 4 to 6 month timeframe. Under a Chapter 13, there is a payment plan to the U.S. Trustee to reorganize and payback some or all of your debt. This is typically a 60 month plan and can be very helpful in reducing penalties and high interest rates on the debt owed.

Under the federal bankruptcy statute, a discharge is a release of the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer required by law to pay any debts that are discharged. The discharge operates as a permanent order directed to the creditors of the debtor that they refrain from taking any form of collection action on discharged debts. This includes legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.

Can I keep my car or my home in Bankruptcy?

Although a debtor is relieved of personal liability for all debts that are discharged, 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. You may keep your cars and home, but you must continue to make the payments in order to retain them.

What are exemptions?

Exemptions are the statutory provisions that define what assets a debtor can keep, free from the claims of his creditors, even in bankruptcy.

What debt will bankruptcy not erase?

  1. money owed for child support or alimony, fines, and some taxes;
  2. debts not listed on your bankruptcy petition;
  3. loans you received by knowingly giving false information to a creditor, who reasonably relied on the information and provided you with loan funds;
  4. debts resulting from "willful and malicious" harm; student loans owed to a school or government body, except if the court decides that payment would be an undue hardship;
  5. mortgages and other liens which are not paid in the bankruptcy case (but a completed bankruptcy will discharge your obligation to pay any additional money if the property is sold by the creditor).

Can a married debtor file without the other spouse?

Yes, but your spouse will still be liable for any joint debts. If you file together you may be able to double your exemptions. In some cases where only one spouse has debts, or one spouse has debts that are not dischargeable then it might be advisable to have only one spouse file. If the spouses have joint debts, the fact that one spouse discharged the debt may show on the other spouses credit report.

What is the automatic stay?

This is an injunction that is effective automatically upon the filing of a bankruptcy. It strictly prohibits the commencement or continuation of any acts to collect on a debt that arose prior to filing the bankruptcy. This includes enforcement of judgments, creating or perfecting liens, and many other actions. (It does not apply to collecting alimony maintenance and support).

Can I pick and choose who to list in my bankruptcy case?

No. You must list all your assets and all your debts in ANY chapter of bankruptcy. You may voluntarily repay anybody you want after your case is concluded (and you are required to repay any debts that are not discharged), but you are still required to list all your creditors.

Can I transfer assets out of my name into someone else's before filing bankruptcy?

If assets are sold for "less than fair market value," they can be recovered by the Trustee as a Fraudulent Transfer.