Bankruptcy Discharge in Houston
One of the primary goals of any bankruptcy is to “discharge” your debt and gain a fresh start. A discharge eliminates your legal liability on the debt and puts an end to creditor harassment, collection actions, lawsuits, and judgments.
Classifying Your Debts
When preparing for bankruptcy, it’s important to understand the types of debt you have and which of these debts are “dischargeable” under the law. The Bankruptcy Code classifies debt under three major categories: (1) secured; (2) priority, unsecured; and (3) general, unsecured.
- Secured Debts. This type of debt includes your mortgage and car payment. If you intend to keep the property, you have to pay the debt. These debts are “secured” by the property, and the lender can foreclose their liens on the property if you fail to pay the debts. To file for Chapter 7, you have to be current on these debts. If you are behind on these debts and wish to keep the property, you can pay the deficiencies through Chapter 13.
- Priority, Unsecured Debts. Congress has identified debts in the Bankruptcy Code that it considers “priority debts” deserving of special treatment, including child support obligations and IRS debt. Section 507 sets forth categories of unsecured claims which Congress has, for public policy reasons, given priority of distribution over other unsecured claims. “Priority” refers to the order in which unsecured claims in a bankruptcy case are paid from the money available in the bankruptcy estate. The higher the priority, the sooner the claim is paid from money in the estate. When the money runs out, the remaining lower priority claims are paid nothing from the bankruptcy estate. Priority debts are not dischargeable through a bankruptcy.
- General, Unsecured. These debts include just about everything else — credit cards, hospital bills, utility bills, credit lines, pay day loans, personal loans, deficiencies from repossessions and foreclosures, broken leases, unpaid utilities, etc. With some exceptions, these debts are usually and completely discharged, or eliminated, in a Chapter 7 case and are paid a percentage in a Chapter 13 case. Most of our clients file for bankruptcy because of these general, unsecured debts.
The bankruptcy laws are designed to give an honest debtor a fresh start, but not a head start. Congress has therefore identified certain debts that cannot be discharged in a bankruptcy for any reason. Many debts that would ordinarily qualify for discharge may still be determined as non-dischargeable if a Debtor has committed a crime or fraud in acquiring the debt.
The following debts are generally non-dischargeable in bankruptcy:
- Back child support or alimony obligations, and debts considered in the nature of support;
- Student loans, unless repayment would cause you undue hardship (discharging a student loan is extremely complicated, costly, and rare);
- Criminal fines or restitution;
- Debts listed in a prior bankruptcy where the debtor was denied a discharge;
- Recent income taxes less than three years past due (subject to other restrictions and requirements); and
- Auto accident claims involving intoxication.
The following situations may also make a debt non-dischargeable:
- Debts incurred on the basis of fraud;
- Debts from willful or malicious injury to another or another’s property;
- Recent purchases with credit cards (typically for luxury items and/or debt incurred within 90 days of filing);
- Debts from larceny (theft), breach of trust or embezzlement; and
- Most federal, state and local taxes and any money borrowed on a credit card to pay those taxes.
The Bankruptcy Court’s Order of Discharge
At the end of your bankruptcy, the court signs a formal Order of Discharge. This Order operates as a permanent injunction against any future collection action. The Discharge Order is commonly misunderstood as “erasing your debts.” The debt still exists, but it is not legally enforceable against you personally. In other words, creditors cannot take any collection action to force or coerce you into paying a discharged debt. In fact, any violation of the bankruptcy injunction can result in a contempt of court and sanctions against the creditor.
The Discharge Order does not prevent you from repaying a debt. If you want to pay back a creditor that was listed in your case, you can. There is no prohibition against repayment of a debt, and you can make voluntary payments without waiving the Discharge Order. Many of our clients choose to pay back their relatives, doctors, and accountants due to the personal relationship with these creditors.
While a discharged creditor cannot collect on the debt, a secured creditor may still foreclose and repossess property if they maintain a valid lien against the property. It is important to stay current on these secured debts during and after the bankruptcy to avoid any problems.
The Discharge Order does not protect co-debtors. For instance, if your father co-signed a personal loan with you, your personal obligation to pay the debt is discharged, but your father is still 100% obligated to pay the loan.
There is no absolute right to a discharge. The Bankruptcy Court can deny your relief if you fail to provide requested documents; fail to complete a credit counseling course and/or financial management course; transfer or conceal property prior to or after the bankruptcy filing; destroy or conceal records; commit perjury or other fraudulent act during the case; or fail to account for the loss of assets.
The Affects of a Discharge On Your Credit
The Fair Credit Reporting Act (“FCRA”) directs credit reporting agencies to exclude bankruptcy case information from all consumer reports ten years after the bankruptcy filing. The FCRA does not distinguish between Chapter 7 or Chapter 13. This means all information about your bankruptcy must be removed from your credit report no later than ten years after the date you filed the case.
You may be asking yourself: Won’t bankruptcy ruin my credit score? The answer depends on your unique circumstances. Every case is different. As a general rule, the bankruptcy filing will drop your score, although in some cases there is very little movement. The good news is this: bankruptcy immediately stops all negative reporting as soon as you file and allows your credit to start improving as soon as you file.
Learn More About the Bankruptcy Discharge Today
To review your debts and determine if they are dischargeable, please call the Westbrook Law Firm, PLLC, at (281) 888-5581. We offer a consultation at several locations around Houston. The road to financial freedom starts here.