Permanently Write Off Debts in Bankruptcy

 Posted on December 14, 2016 in Discharge of Debts

The main goal of bankruptcy is often to write off—“discharge”—your debts. Here’s how it works in Chapter 7 “straight bankruptcy.”

When you file bankruptcy, especially Chapter 7 “straight bankruptcy,” the relief you want is to be free of your debts. Chapter 7 accomplishes this by giving you a “discharge” of all or most of your debts. A discharged debt is permanently written off. It’s explicitly illegal for your creditors to take any further collection action on them.

A Bit of Eye-Opening History

You might think, well of course bankruptcy discharges debt—that’s what it’s supposed to do.

So you may be surprised to learn that for much of the history of bankruptcy there was no discharge of debts. In England, where we get much of our law, back in the 1500s debtors were called “offenders.” Only creditors could file bankruptcy, in order to have the assets of the “offender” seized and sold to pay creditors. After the bankruptcy the creditors could continue chasing the “offender” for any remaining balance owed. In the 1700s the discharge of debts was added, but only if the creditors agreed to allow it!

Chapter 7 Discharge

Contrast that with what now happens in most consumer Chapter 7 cases. They finish in less than 4 months with a court order discharging all or most of the debtor’s debts. Occasionally the debtor has to give up some asset(s) in return, but not most of the time.

You “Shall” Get a Discharge

Federal law makes clear that under Chapter 7 the “court shall grant a discharge.” (Section 727(a) of the Bankruptcy Code.) Sure, there are exceptions, which we’ll cover in upcoming blog posts. But the law starts with the strong assumption that you are entitled to a discharge of your debts through bankruptcy.

When Debts are Discharged

Just before the end of a Chapter 7 case the bankruptcy judge signs a court order discharging your debts. The main legal effect of that discharge order is described in Section 524(a)(2) of the Bankruptcy Code as follows:

“A discharge... 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 of the debtor... .”

This means that your creditors can’t do anything whatsoever to collect the debt. They can’t contact you, can’t start or continue a lawsuit against you; they can’t do anything. This injunction against all collection actions lasts forever.

Enforcing This Injunction

This discharge-of-debts law has some teeth. It’s illegal for a creditor to try to collect a debt discharged in bankruptcy. It’s a violation of a federal injunction, and therefore a violation of federal law. As a result creditors very seldom try to collect a debt once it’s been discharged.

If a creditor nevertheless does try to collect a discharged debt, a bankruptcy judge can hold it in contempt of court for breaking the law and violating its injunction. Section 105(a) of the Bankruptcy Code. The court could require the creditor to pay you punitive damages, your attorney fees, and impose other sanctions. Again, creditors don’t usually invite this kind of hassle and potential punishment.