Posts Tagged ‘Automatic Court Orders’

The Discharge

WHAT IT IS:

It’s the reason one files for bankruptcy relief….to obtain a discharge.  A discharge is a Federal injunction prohibiting the debtor’s creditors from ever attempting to collect from the debtor on account of a claim it had against the debtor at the moment the debtor filed its bankruptcy petition.  Essentially, it absolves a debtor of its legal obligation to repay debt the debtor had before it filed for bankruptcy relief.

WHEN IT HAPPENS:

A debtor’s discharge is effective when the bankruptcy court enters an order granting the debtor a discharge.”  In a chapter 7 case this typically occurs approximately 100 days after the the bankruptcy petition is filed.  In reorganization cases, that order is entered after the completion of the reorganization plan.

WHAT IS ITS SCOPE:

The discharge is very broad and affects credit card debt, medical debt, business loans/guarantees, and other various debts.  There are, however, some exceptions; not every debt is subject to the discharge:

  • Debts such as child support, alimony or spousal support are non-dischargeable (this may include childcare, school-related expenses, health insurance, and out-of-pocket medical costs).
  • Some taxes are non-dischargeable, while others may be discharged (depending on the age of the tax obligation, and whether the returns were timely filed).
  • Debts incurred due to fraud, or misrepresentations on financial statements/loan applications are non-dischargeable.
  • Debts incurred due to theft, breach of fiduciary duty, or embezzlement are non-dischargeable.
  • Debts incurred due to malicious and willful injury to another person or property are non-dischargeable.
  • Court fines are non-dischargeable.
  • Debts incurred due to the operation of motor vehicle while intoxicated are non-dischargeable.
  • Student loans are typically non-dischargeable.

These are just the more common exceptions; there are other exceptions that might apply, and if you are considering bankruptcy, you’ll want to discuss your circumstances with an attorney to see if any exceptions apply in your case.

Also, the scope of the discharge depends on the chapter the debtor files.  For instance if a debtor file a chapter 7, it may not discharge a debt incurred in a divorce decree (if such debt is not child-support, alimony or spousal support), but the debtor may discharge that obligation if the discharge is entered pursuant to chapter 13.  A debtor who is not an individual (but a corporation, or an LLC) may not receive a discharge in a chapter 7, but may receive a discharge entered pursuant to chapter 11.

Just because a debtor receives a discharge does not mean it cannot voluntarily repay the debt if it is so inclined.  While the debtor may not be under a legal obligation to repay it, it may desire to do so and the bankruptcy code allows it to.  A discharged debt cannot be revived, so one need to worry about only repaying a portion of the discharged obligation; simply paying a fraction toward the discharged debt does not revive the debt.

Now, the discharge simply discharges the debtor from having to repay the debt.  It does not affect any security interests a creditor may have in any collateral (such as a home or a car).  To alter the creditor’s security interest, the debtor must reorganize through one of the reorganization chapters (9, 11, 12, or 13) and have a reorganization plan confirmed by the bankruptcy court.  Therefore if a chapter 7 debtor discharges his home or car loan, the lender can still foreclose on the home or repossess the vehicle.  Hence the common inquiry from potential debtors: “Can I file bankruptcy and still keep my home? or car? ”  And typically the answer is: “Yes, you can.  If you are able.”

A discharge is automatically granted during the process of a bankruptcy proceeding.  And unless the court orders otherwise, all debts but those by code definition to be non-dischargeable will be subject to the discharge order….including car and home loans.  Thus, with regards to those debts, if a debtor takes no action after filing the bankruptcy petition, the debts will be discharged and car or home lenders will likely proceed with repossession or foreclosure.  However, a debtor can take affirmative action to except certain debts from discharge through a process called “reaffirming a debt.”  In a nut shell, this process involves the debtor and creditor signing a “reaffirmation agreement” in which the debtor agrees to remain liable for the balance owed on the car or home loan and the the lender agrees not to repossess the car or foreclose on the home so long as the debtor is not in default of the underlying loan agreement.  Essentially this allows the car or home loan to pass through bankruptcy.  The positive of this is that the debtor gets to retain the car or home.  Also reaffirmed debts will be disclosed on the debtor’s credit report, thus timely payments help improve a debtor’s credit post-bankruptcy.  The drawback is that should something happen to the debtor that prevents the debtor from paying the debt, the debtor cannot go back and use the discharge and a defense to having to pay the debt.  Additionally, a court will only allow a debtor to reaffirm a debt if the debtor can afford to do so; thus the debtor will need to show that even after reaffirming a debt it has still has positive income (at least $0.01) each month.

It is often espoused from the court that bankruptcy is for the honest, but unfortunate debtor.  Thus if a debtor fails to be forthcoming with information, or misleads the bankruptcy court, the trustee, or its creditors a debtor may be denied a discharge, or have his discharged revoked.  This is not something that any debtor wishes to have happen to him or her.  In such an event, the debtor can likely lose what non-exempt equity it may have and still be obligated on the debts it attempted to discharge in bankruptcy.  Further the debtor cannot go back to the court later in life and attempt to discharge the same debts.  Thus it is vital for a debtor to be honest and forthcoming with information about its financial affairs so to not risk the denial or revocation of a discharge (not to mention its a Federal felony to commit bankruptcy fraud!).

Income Tax Turnover Order

The Income Tax Turnover Order is an automatic order issued by the court when every Bankruptcy Petition is filed and remains in effect for the entire period during which a case is open.

It requires that a debtor do 3 things:

1. That a debtor file their State and Federal tax returns in a timely fashion (so either by April 15th or if an extension is filed, by October 15th).

2. That the debtor turn over to the trustee all tax returns that the debtor files for any tax year during which the bankruptcy case was open. This can span several tax years. I advise chapter 7 debtors that even if their case is currently closed, if it was open during the tax year, then forward a copy of the tax returns to the trustee.

3. That the debtor turned over to the trustee all tax refunds the debtor possessed on the petition date, or received while the case is open.

In a chapter 7 case, the Income Tax Turnover Order also requires that a chapter 7 debtor file all pre-petition tax returns that were required to have been filed but were not filed.

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