Arizona Bankruptcy Lawyers

Monday, August 20, 2012

The Bankruptcy Discharge

     Bankruptcy is intended to be a "fresh start for the honest but unfortunate debtor."  In order to grant that "fresh start," the Bankruptcy Code provides a "discharge" of certain debts for individual debtors.  The discharge acts as a permanent injunction for all dischargeable debts.  The discharge replaces the temporary injunction of the automatic stay.  

     A bankruptcy discharge releases the debtor from personal liability for all but certain specified types of debts.  In other words, the debtor is no longer legally required to pay any debts that are discharged.  The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.

     Although a debtor is not personally liable for discharged debts, a valid lien that has not been avoided in the bankruptcy case will remain after the bankruptcy is concluded.  Therefore, a secured creditor may enforce a lien to recover the property secured by the lien.   

Objections to Discharge

     Section 727 of the Bankruptcy Code provides several circumstances under which a debtor is not entitled to receive a discharge in bankruptcy.  For example, a debtor may not be entitled to a discharge if he destroyed or falsified records or transferred property prior to the bankruptcy filing "with intent to hinder, delay, or defraud a creditor.  An objection to the debtor's discharge under section 727 is, in effect, an objection to the bankruptcy as a whole.

     Creditors may also file a complaint to determine the dischargeability of a particular debt.  Section 523(a) of the Bankruptcy Code specifically excepts certain categories of debts from the discharge granted to individual debtors.  In most cases, the exceptions to discharge apply automatically if the language prescribed by section 523(a) applies.  The most common types of nondischargeable debts are certain types of tax claims, debts not listed on the debtor's schedules, debts for spousal or child support, and certain school loans.

    Other types of debt may be discharged unless a creditor files a lawsuit in the bankruptcy case (called an "adversary proceeding") seeking to except the debt for the discharge.  These debts include debts obtained by false pretenses or fraud, debts "for fraud or defalcation while acting in a fiduciary capacity," embezzlement or larceny, and debts "for willful and malicious injury by the debtor."

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