Personal Bankruptcy Dischargeable Debts
Which debts are dischargeable in personal bankruptcy cases filed by consumers?
Most ordinary debts are dischargeable. That is, ordinary in the sense of debts acquired in the normal course of daily living. Chapter 7 personal bankruptcy allows debtors to discharge bank loans, credit cards and accounts payable to merchants. Leases may be cancelled and liability discharged for real estate, cars and a wide assortment of personal property. Debts associated with contracts are dischargeable through personal bankruptcy. Liability for court judgments can also be discharged through personal bankruptcy in many circumstances, including judgments obtained for non-payment of dischargeable debts. As a general rule, debts are dischargeable unless specifically excepted by law.
Terminating secured debts in personal bankruptcy
Debtors are not allowed to both discharge a debt and retain pledged collateral. A choices must be made: 1) retain the collateral and remain liable for payment, or 2) surrender collateral and discharge liability.
To retain collateral, a reaffirmation agreement is required. In the most basic sense, a reaffirmation agreement is a special contract that must be in writing and approved by the court. The agreement contains the debtors agreement to retain property and remain liable for payments. The agreement also contains statutory notices regarding the impact of reaffirming debt and that future collection efforts, if any, will be approved by the court even while the case is pending. For approval of a reaffirmation agreement, a court hearing is required yet motions are seldom contested or denied. Debtors may rescind reaffirmation agreements at any time prior to discharge, or within sixty days, by giving notice of rescission.
Discharge through personal bankruptcy eliminates debts completely
A personal bankruptcy discharge wipes-out debts as if they never existed. Also, in limited circumstances, a personal bankruptcy discharge can be revoked and the debt reinstated if obtained by misrepresentation, fraud, or knowing deception. Under 11 U.S.C. 524, the effect of discharge:
- voids any judgment at any time obtained, to the extent that such judgment is a determination of the liability of the debtor during or after the completion of a personal bankruptcy cases;
- operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability during or after the completion of a personal bankruptcy cases; and
- operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the personal bankruptcy estate.
Be aware, when a debtor's spouse does not also file jointly for personal bankruptcy, discharge only benefits debtor who actually filed. Many times one spouse hopes to file bankruptcy and wipe out all debts, while the other spouse would be a lucky beneficiary of a personal bankruptcy discharge without filing. This is forbidden. If you are not listed as the debtor in a bankruptcy case, you will not be discharged and remain liable for full performance.