If you are considering filing bankruptcy, you are probably thinking about the end goal: eliminating your debts. In bankruptcy, the elimination of debt is known as a bankruptcy discharge. Essentially, a bankruptcy discharge declares most debt legally unenforceable and therefore prohibits creditors from taking any kind of collection action against you. The discharge takes the form of an official order from the court, which is entered after completing all the legal and procedural requirements for the type of bankruptcy you filed.
But the bankruptcy discharge has exceptions and nuances. In fact, the discharge order entered by the bankruptcy court is a general, routine order entered in all cases, and it does not explicitly list which specific debts are no longer enforceable and which specific debts survive bankruptcy. This article is intended to help clarify some of these exceptions and nuances of the bankruptcy discharge.
Statutory Exceptions to Discharge
The general rule in bankruptcy is that your debts are discharged unless a statutory exception applies. Many statutory exceptions apply automatically without any specific action on the part of the creditor. The most common debts that automatically survive bankruptcy include:
- Domestic support obligations (i.e., alimony and child support);
- Certain tax debt;
- fines, penalties, and criminal restitution; and
- student loans.
Student loans can be discharged in specific circumstances if you bring a specialized lawsuit within the bankruptcy case—known as an adversary proceeding—against the student loan lender to demonstrate and prove that repayment of the student loans causes you undue hardship. But note, however, that the criteria to determine eligibility for a student loan discharge is notoriously strict and fact-intensive.
Finally, a creditor can commence an adversary proceeding against you to ask the court to determine that the debt owed is excepted from the bankruptcy discharge. This process is limited to unique factual situations, such as when the obligation owed is based on fraud or if you caused a willful and malicious injury to another or their property. If a creditor fails to bring this adversary proceeding, the debt owed will be included in the debts that are discharged.
Personal Liability is Discharged, but Liens Survive Bankruptcy
While the bankruptcy discharge renders most debt legally unenforceable, this is limited to your personal liability. Some creditors may have a lien, which is a secured interest in your property or “collateral.” The following are common types of liens:
- Voluntary Liens: you give a lender an interest in the property, such as a house or car, that serves as collateral for the loan. The lien protects the lender if you stop making payments on the loan.
- Statutory Liens: Pursuant to federal or state law, a lien is imposed on your property. Common statutory liens include tax liens and construction/mechanic’s liens.
- Judgment Liens: In many states, including Utah, a creditor who commenced litigation and obtained a judgment against you can record the judgment in a county recorder’s office to obtain a judgment lien against property located in that county.
With limited exceptions, liens survive the bankruptcy discharge. For some, this means a creditor could choose to enforce the lien against the property itself after bankruptcy, but the creditor cannot collect any shortfall from you.
Voluntary Repayment and Reaffirmation Agreements
Nothing prohibits you from voluntarily repaying a debt after you receive a bankruptcy discharge. This may be done for a variety of reasons, but the most common is to prevent a creditor from enforcing its lien against your property. Many lenders will accept payment and usually won’t foreclose or repossess the property as long as you remain current. A benefit of this informal arrangement means that the bankruptcy discharge is still applicable and protective. So, if circumstances change, you can stop the voluntary payments, and you won’t face any personal consequences for the remaining balance.
On the other hand, you can enter into a formal arrangement with your creditors. This formal arrangement, known as a reaffirmation agreement, is where you and your creditor enter into a new contract to remove a specific debt from the bankruptcy process. In other words, you agree to remain legally responsible for the debt after your bankruptcy is finalized, even if things change and you cannot pay in the future. There are certain requirements that must be met for this type of agreement, and some may require court approval. Therefore, it is recommended that you fully understand these types of agreements for their potential advantages and foreseeable risks.
Our office can help! If you are overwhelmed, facing financial hardship, and may be considering bankruptcy, give us a call. We can go over your personal situation, answer your questions, and review your options moving forward.