Recent studies found that as many as 80% of Americans are living in debt. Mortgages are the most common type of debt, followed by credit cards, cars, and of course student loans.
For most people, debt is just another part of life and they don't have any problem making the required monthly payments. But many are struggling with crippling debt which causes stress and anxiety, not to mention repossession and other legal troubles.
If you've found yourself in over your head, filing for bankruptcy will likely bring relief.
But it's important to understand what bankruptcy entails to make sure it's the right choice. Keep reading for everything you need to know on discharge in bankruptcy.
What Is a Discharge in Bankruptcy?
In the United States, a discharge in bankruptcy is a court order that releases someone from any obligation to pay a debt. Dischargeable debts are mainly unsecured loans like personal loans or credit card debt. Courts of law can give a discharge after holding a hearing to determine your eligibility for a bankruptcy discharge.
To collect a discharged debt, creditors can only go after property or assets attached to the loan. The bankruptcy discharge prevents them from suing the debtor, harassing them with collection calls, or pursuing wage garnishment.
Cancellation of debt can give you a brand-new lease on life and save you a lot of money.
Bankruptcy Discharge Considerations
Once your debts are discharged through bankruptcy, the debt is legally wiped away and your creditor can't pursue payment any longer. This may be a dream come true if you are struggling with debt. But there are some things you should consider.
For instance, your credit rating may be negatively affected. You may also not be able to take out a low-rate loan for years. Simple things like renting an apartment or getting a phone plan also become harder if you have a negative credit rating. However, many people see their credit ratings improve very quickly after bankruptcy because creditors recognize that they are on the right path.
Before granting a bankruptcy discharge, courts must establish that the debtor has no financial means to pay off their loans. The court also may require that you attend pre-discharge debtor education sessions.
Another thing to keep in mind as you consider filing for bankruptcy is that not all types of debts are dischargeable. Under US law, you can't discharge tax-related debts, spousal or child support fees, government fines, or student loans. Trying to declare bankruptcy for such debts will lead to a bankruptcy court dismissal.
This is why it's important to seek expert legal counsel when considering bankruptcy discharge.
Also, be aware that your discharge does not prevent creditors from going after your co-signers or joint account holders on any of your debts. So if your mom or dad co-signed your loan and you declare bankruptcy, they will shoulder the full weight of its payment.
Differences Between Chapter 7 and Chapter 13 Bankruptcy
If you decide to file for bankruptcy, there are two main routes that you can follow ─ Chapter 7 or Chapter 13. What are the differences?
Chapter 7 Bankruptcy
Chapter 13 Bankruptcy
Clears your debt but you may have to surrender assets like property or cash to help pay off creditors.
Allows you to keep your property but you must agree to a repayment plan to pay off a portion of your debt over 3 to 5 years.
Stays on your credit report for 10 years.
Stays on your credit report for 7 years.
May take up to four months after filing for for the discharge to occur.
Discharge is effective within 4 months of filing, but it will take 3 to 5 years to complete the repayment plan.
May require you to surrender or sell property.
Requires that you have means to pay off most of your debt.
Future lenders may look more favorably on a Chapter 13 bankruptcy.
May put you in a better long-term financial standing.
Of course, a reputable bankruptcy attorney will help you weigh the pros and cons of these two remedies and steer you in the right direction.
Relief Through Debt Discharge
Once you file for bankruptcy, the court does its best to process the claim as fast as possible. You can have debts discharged in Chapter 7 in 3 to 4 months after you file the petition. Chapter 13 bankruptcies are discharged as soon as you complete the payment plan. This often takes between 3 to 5 years.
Once the court grants a discharge order, it sends a notice of the discharge. The notice informs creditors that the debt owed to them has been discharged and they should stop pursuing payment.
A clerk of the court mails the discharge document to all the parties concerned. This includes the following:
- The creditors
- The U.S trustee
- The trustee on the case
- The trustee's attorney
- The debtor
- The debtor's attorney
The discharge document states that any creditors that continue pursuing payment after the discharge may be prosecuted.
The inability to pay off financial debt can be quite stressful. This is especially true if you have debt collectors hounding you for payment. In such cases, a bankruptcy discharge can be an effective way to press the reset button on your finances and start them afresh.