For bankruptcy purposes, the term discharge refers to the legal eradication of a debt. A debt that is discharged can no longer be enforced against the debtor; however, any liens securing the debt may survive the bankruptcy case.
Normally, a bankruptcy discharge means that the individual debtor’s financial liabilities are erased or wiped out. When a discharge is granted, it protects the debtor from personal liability on the discharged debt. However, a discharge is only allowed for certain debtors and for certain debts. For example, non-individual debtors cannot obtain a discharge in a Chapter 7 bankruptcy. Additionally, if a partnership or corporate debtor is liquidating under Chapter 11, and will cease operations upon completion of the plan, the debtor cannot receive a discharge.
Debtors may be deprived of a discharge if they’ve committed fraud against the court by lying, being uncooperative, or concealing or destroying estate property. In these cases, debtors are denied bankruptcy and will remain liable for pre-petition debts.
Certain debts are not dischargeable under Chapter 7, including:
- debts resulting from fraud, misuse of funds, embezzlement, or larceny
- debts that arise under false pretenses, including bogus representation, fraud, or false financial statements
- debts for certain taxes
- certain debts that result from the purchase of luxury merchandise or cash advances
- obligations a debtor neglects to list in the bankruptcy schedules
- alimony, child support, and other debts arising out of a divorce or separation
- student loans
- orders of restitution and debts resulting from willful and malicious injury
In cases of Chapter 11, debtors may receive a discharge of all debts that occurred before the plan was confirmed. However, in cases of individual debtors, the exceptions to discharge established by Section 523 of the Bankruptcy Code pertain. For more information on this topic, check out Chapter 11 Bankruptcy and Discharged Debts.
In Chapter 13 cases, and with a few exceptions, obligations detailed within the plan will be discharged when all payments under the plan have been made. The only debts not discharged under Chapter 13 are:
- criminal fines and restitution
- obligations not listed on the debtor’s bankruptcy schedules
- debts for spousal maintenance, alimony, and child support
- student loans
- debts related to drunk driving convictions
These exceptions apply to individuals only; corporations are not eligible for discharges. That said, under Chapter 7 corporations are allowed an orderly liquidation directed by the trustee, and without shareholder expense. Creditors are guaranteed compensation in accordance with available resources and according to claim priority. In addition, the corporation’s previous management is assured that assets remaining after all Chapter 7 expenses have been paid will be used to pay taxes, for which they as individuals may be legally responsible.
Dischargeable debts for Chapter 7 include:
- auto accident claims
- business debts
- income taxes that aren’t priority taxes
- medical bills
- negligence claims
- personal loans and credit card debts
- tax penalties over three years old
Debts that are not dischargeable include:
- accident claims involving intoxication
- child or family support
- criminal fine or restitution
- debts listed in a prior bankruptcy where the debtor was denied a discharge
- penalties (other than tax penalties) payable to the government
- recent taxes
- student loans
- trust fund taxes
- unscheduled debts
A creditor who wishes to contest the discharge of the debts must promptly take the action necessary to advance his claim. For more information on this topic, also read Bankruptcy Discharge of Tax Debts: Navigating the Minefield.