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What is a bankruptcy discharge?

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The typical consumer files a bankruptcy case in order to obtain a “discharge” of overwhelming debt. An unfortunate word that is used to describe what for many is a life changing “event”. Why?

When a debt is “discharged”, the obligation of the debtor to pay it, no longer exists. The obligation is simply gone…poof. It is government intervention in the realm of private contract relationship at it’s “finest”, and with some careful planning and preparation, it works like a charm.

Having said that, this powerful discharge has it’s limits.

1. It doesn’t deal with every debt. Some debts cannot be “discharged” by statute, like child support, newer income tax debt, spousal maintenance etc.

2. Even though the personal liability may no longer exist as a result of the “discharge”, liens recorded against the debtor’s property, may survive the bankruptcy unless they are modified or removed.

3. You can’t get very many of them too close together. There are time limits that prevent “serial” bankruptcy filings and thus too many discharge “events”. The creditor has to have some time to collect the debt between discharge dates.

4. Not everyone needs bankruptcy for purposes of obtaining a discharge. Some need it for other reasons, like saving a home from foreclosure or restructuring the repayment of debt. These people don’t care as much about the discharge as others.

For those debts like credit card, repossession related, old income tax and medical bill debt that are typically governed by it, not only are they “gone”, the discharge acts as a “permanent injunction” or a court order at the close of the case, against those same creditors. It replaces the “automatic stay”.

If the creditor continues, post discharge, to attempt collection, that order is being violated, and can result in “punishment” for the offending creditor. Possibly even “punishment” in the form of money to the debtor.

If you have overwhelming debt, have been losing sleep consistently over it, and see no way to pay it in a reasonable amount of time, you probably need to “aquaint” yourself with the “discharge” provisions of the U.S. Bankruptcy Code.