The basic rule is that bankruptcy discharges all your debts unless a particular debt fits a listed exception. Focusing on Chapter 7, you will likely receive an Order of Discharge from the bankruptcy court within about 4 months of filing the case. The heart of this court order states simply that “A discharge . . . is granted to [the debtor].”
Exceptions to Discharge
Section 523 of the Bankruptcy Code covers “Exceptions to discharge.” There are two categories of exceptions:
1) debts which will still be discharged, unless the creditor objects and prevails in that objection, and
2) debts which do not require objection by a creditor.
1) Debts Requiring Successful Creditor Objection
In this first category, “the debtor shall be discharged for [the] debt of a kind specified” “unless, on request of the creditor . . . , the [bankruptcy] court determines such debt to be excepted from discharge . . . .” Section 523(c)(1) of the Bankruptcy Code. In other words, these kinds of debts DO get discharged unless ALL of the following are true:
* the debt is “of a kind specified”
* the creditor requests a court determination
* the court determines in favor of the creditor that the debt should be “excepted from discharge”
There are 3 kinds of debts of this sort in which a creditor can ask for a court determination about discharge of the debt:
1. Fraud Debts: incurred when a debtor makes a misrepresentation or commits
fraud to get a loan or credit. Section 523(a)(2).
2. Theft, Embezzlement, Fraud in a Trust Relationship: stealing from anyone, such as an employer or business partner, and especially from someone in a fiduciary relationship. 523(a)(4).
3. Willful and Malicious Injury: intentionally and maliciously harming a person or business, and/or property. 523(a)(6).
Timely and Successful Objection
How does a creditor ask for a court determination that a debt falls within one of these categories? The creditor files a formal “adversary proceeding,” which is a type of limited lawsuit, in the bankruptcy court. The creditor has to file this lawsuit within a strict deadline, usually within 60 days after the first scheduled meeting of creditors. The notice of commencement of case contains all relevant deadlines. If the creditor received appropriate notice of the bankruptcy case, but does not object by this deadline, then that debt is discharged. If a creditor does timely object, how does the bankruptcy court decide whether a debt should get discharged? Unlike most lawsuits on a debt, the court does not need to determine whether the debtor owes the debt. That is generally not at issue. Rather, the question is whether the facts support the narrow grounds of fraud and such which make the debt not dischargeable. If the creditor cannot prove the necessary facts, the debt will still be discharged.
2) Debts Not Requiring Creditor Objection
The kinds of debts that are discharged, unless a creditor objects, generally involve some bad action by a debtor towards the creditor. The general idea is that if a creditor cares about being wronged, it will raise an objection to the discharge. In a second category of not discharged debts, the creditors do not need to object. That’s because the kinds of debts in this category are not dischargeable simply because of the nature of the debt. There does not need to be a court determination. It’s usually quite straightforward whether or not the debt belongs to these nondischargeable types of debt. Here is a list of debts that Chapter 7 does not discharge, even without creditor objection:
* Criminal fines, fees, and restitution
* Income taxes, and other forms of taxes, under certain conditions
* Child and spousal support
* Student loans that don’t cause an “undue hardship”
* Claims for bodily injury or death from driving while intoxicated
* Debts not listed in your bankruptcy schedules, under certain limited conditions
There are occasionally questions about whether the debt at issue fits the not-discharged definition. In those instances, an Adversary Proceeding is necessary to obtain a Court Order as to whether that particular debt is discharged. However, it’s usually clear whether a debt is, for example, a criminal fine or child support. Share your concerns with me during your first meeting about whether a particular debt may not be discharged. You will learn whether or not you really have something to be concerned about.