Bankruptcy is a federal court process. Bankruptcy lets individuals and businesses either get rid of debts or repay debts according to a payment plan.

The person or business that has filed a bankruptcy case is called the debtor. A creditor is any person or business owed a debt on the date the bankruptcy case was filed.

A bankruptcy discharge is a court order that eliminates certain debts. The discharge bans creditors from taking collection action on discharged debts. Thus, creditors may not take legal action or even communicate with the debtor about the discharged debts.

Chapter 7

Chapter 7 is one type of bankruptcy. It normally governs liquidation of a debtor. Liquidation is a form of relief afforded by the bankruptcy laws that involves taking control of the property of the debtor, selling it and distributing the money to creditors. If the debtor is an individual, the process ends in the discharge of the debtor.

Discharge

A discharge lets an honest debtor begin a new financial life. In the typical chapter 7 case, the court grants a discharge early during the course of the case. Generally, even before any money is paid to creditors. The discharge gets rid of all of the debtor's debts unless they are exceptions.

A debtor who gets a bankruptcy discharge is no longer responsible for the payment of debts included in the discharge. Chapter 7 bankruptcy requires the debtor to liquidate assets and pay creditors according to certain priorities, with most unsecured debts subject to discharge.

Any of the debtor's property that is not exempt property will be converted to money by the trustee and paid to creditors. If there is little or no property, creditors may receive nothing. A chapter 7 discharge frees the debtor from the obligation to pay the discharged debts and it prevents creditors from continuing attempts to collect the debt.

Nondischargeability of Certain Debts

Even if the individual debtor gets a discharge in a chapter 7 case, certain claims are considered nondischargeable. Fraud claims, domestic support obligations, claims for willful and malicious injury, unscheduled debts, educational loans and debts related to violations of federal or state securities laws are examples of those that are excepted from the discharge.

Required Financial Management Course

A debtor will not receive a chapter 7 discharge if he hasn't completed a financial management course. A debtor must file a certificate showing he has taken the required course within 45 days of the first meeting of creditors, also called the 341 meeting, or the debtor's case may be closed without a discharge being issued. Approved personal financial management course providers are listed on the US Department of Justice Web site.

Questions for Your Attorney

  • What debts are not dischargeable in chapter 7 bankruptcy?
  • Do all creditors receive money or property in a chapter 7 bankruptcy?
  • How soon after filing for chapter 7 does the court grant a discharge?