Florida Bankruptcy Guide: Steps 8 - The Discharge
Guide to Filing Bankruptcy in Southwest Florida
—From the Debtor’s Perspective—
What Can I Expect? What is the Process?
Which Chapter Should I Choose?
What is the Best Strategy?
Life After Bankruptcy
Christopher D. Smith
Attorney at Law
STEP 8: The Discharge
A discharge is your main goal in a bankruptcy and the reason you filed. It is a court order signed by your judge which states that you are no longer obligated to pay your dischargeable debts, and it operates to permanently enjoin (prohibit) your creditors from attempting to collect the discharged debt from you. A discharged debt is no longer enforceable against you personally.
For a debt to be discharged, it must:
- be a dischargeable debt;
- be scheduled by the debtor in the petition (some exceptions apply to no-asset cases);
- not have been subject to an order denying discharge or a waiver of discharge; and
- not have been reaffirmed by the debtor.
The timing of the discharge varies, depending on your particular circumstances. In a Chapter 7, the court usually grants the discharge about two to three months after the first date set for your Creditors’ Meeting, unless an interested party should first file an adversary proceeding to deny your discharge or request an extension. In a Chapter 13, the discharge will arrive shortly after the final payment has been made to the trustee.
It is very important for you to understand what happens to your secured debts when they are discharged in bankruptcy. A secured debt is a debt which is backed by collateral that can be repossessed by your lender if you default on your loan. The most common secured debts are car loans and mortgages, but other types of secured debts are judgment liens (special rules apply) and certain types of consumer-financed debt, such as furniture loans and appliance loans. If you did not reaffirm your secured debt in your Chapter 7, or make payment provisions in your Chapter 13, your secured creditor can (and usually will, especially for vehicles) repossess your collateral.
Your discharge eliminates your personal liability on that secured debt, so that you are not obligated to pay your lender. However, it does not eliminate your lender’s right to repossess the collateral, so they are still permitted to take back your car or foreclose on your house, if you no longer pay them. The good news is that your discharge will prevent deficiency claims against you after repossession or foreclosure (which could have been huge debts), but the bad news is that you will lose the collateral. Therefore, when surrendering a house or car in bankruptcy, remember that your lender will someday come and retake that property, either through a foreclosure or repossession. Cars can be repossessed fairly quickly in a bankruptcy, but homes still must go through a foreclosure before you lose your interest (which is a long process in Florida).
One side note to this issue concerns first mortgages in Chapter 7 cases: Unless you have received a first mortgage from a credit union, it is highly unlikely that you will be asked to reaffirm your mortgage debt as a prerequisite to keeping your house. This is because the first mortgage lender is already in a superior legal position, and that lender can always retake your house if you do not pay your debt, so there is little benefit in obtaining a reaffirmation from you. As for junior mortgages, we never suggest that you reaffirm those debts unless you have substantial equity in your house, since in the present real estate environment in Florida it is very unlikely that your junior mortgage will attempt to foreclose on your house after a bankruptcy.
Also, you must be advised that if you have multiple mortgages on your house and continue to pay your first mortgage holder after a bankruptcy, you probably will be able to keep your house for many, many years, if not indefinitely. However, unless you stripped your junior mortgage lien(s) from your property in a Chapter 13, the lien from the junior mortgage is still sitting on your title, even though the lender is probably idle. This means that if you have dreams of someday selling your house after a bankruptcy, that second mortgage will still need to be paid off at closing, even though you might not have been paying that mortgage for many years.
There are some debts that cannot be discharged due to public policy reasons. Non-discharged debts may still be pursued against you after bankruptcy. There are certain debts that can be discharged in a Chapter 13 case that cannot be discharged in a Chapter 7. Below is a list of common debts that will not be included in your bankruptcy discharge:
- Student loans (the definition is very broad and relates to any loan incurred for educational purposes).
- Most taxes, government fines and penalties (older taxes can sometimes be discharged).
- Child support.
- Spousal support (alimony).
- Property settlements from divorce (not dischargeable in Chapter 7, but dischargeable in a Chapter 13).
- Debts incurred from fraud, larceny, embezzlement, or damage from willful and malicious acts (non-dischargeable if a creditor should file a successful dischargeability action, otherwise these debts are dischargeable).
- Court fines and criminal restitution.
- Personal injury caused by drunk driving.
- Debts not listed on your bankruptcy papers (in no-asset Chapter 7 cases, most courts have determined that unlisted debts can still be treated as discharged).
- Debts accrued after you filed your case.
Question: What is the difference between a bankruptcy discharge and the closure of my case?
You should not confuse your discharge with the closure of your case, since they can be very different events. In a Chapter 7 case, if there are no non-exempt assets to administer and if your trustee has filed a Report of No Distribution following your Creditors’ Meeting, then your case will usually close at the same time as discharge. However, if your trustee has recovered assets from you and funded a bankruptcy estate, the trustee will notice your creditors and request that they file claims against the estate. While this is occurring the case will remain open, potentially for months or years, even after you have already received your discharge. Until closed, your case is still an active case and the trustee is still able to recover your non-exempt property notwithstanding the entry of discharge. In simple terms, your discharge relates to your debts, and the case closure relates to your assets.
Question: My case just closed. What does this mean?
Congratulations, it means everything is done. Any assets that have not been administered by your trustee now revert back to you and you are free to dispose of those assets. Be careful, however, because if you failed to disclose your assets or committed perjury during your case, your trustee can reopen your case to revoke your discharge or administer those assets. This window to revoke a discharge is generally one year, but there is no window of time for a trustee to reopen your case to pursue your concealed assets.
If you fail to complete your debtor education class in a timely manner, your case could close without the entry of discharge. This would be devastating and defeat the very purpose of your bankruptcy. Therefore, we strongly encourage all Debtors to take their Debtor Education Class as soon as possible after the filing of the case.