The main goal of a bankruptcy case is to discharge the debtor of all debts. This means eliminating all remaining debts. In chapter 7, this happens usually within 90 days of filing. In chapter 13, discharge occurs at the end of a debtor’s plan. But what happens once the debt is actually discharged? Is a debtor limited in what actions they can take? Are creditors able to collect any remaining debt from co-signors? This blog post will explore what happens after a debtor’s case is completed and the debts discharged.
What is Discharge?
The goal of bankruptcy is to discharge all debts. In a chapter 7 case, this usually means a “clean slate” and discharging any unsecured debts, such as medical bills or credit cards. In a chapter 13 case, discharge is only achieved once all chapter 13 plan payments are made. Once this happens, all pre-petition debts are discharged.
Discharging a debt means that the debtor is no longer obligated to make any payments to the party the debt is owed to. This is an important distinction. If someone owes money along with the debtor, often a co-debtor or co-signer, they still owe that debt. A discharge in bankruptcy does not delete the debt from existence, but instead releases the debtor from personal liability on that debt. The debt still exists and may be collected from a co-obligor, guarantor, and alter ego.
Discharge occurs at the end of a bankruptcy case. Not to be confused with the dismissal of the bankruptcy case, discharge wipes the debt from the debtor. Dismissal, on the other hand, may leave the debt in place if it is not in conjunction with a discharge.
Not all debts can be discharged in a given case. Some examples include:
- Student loans
- Child support and alimony
- Certain taxes
- Government fines
- Debt from fraud
- Fines and restitution for criminal acts
While these debts cannot be discharged, often a debtor will find paying these debts substantially easier with the discharge of the qualifying debts.
How is Discharge Enforced?
Section 524(a)(2) of the Bankruptcy Code protects a debtor from any collection actions commenced by a pre-petition creditor. This means a party that is owed money prior to the bankruptcy is filed is prohibited from performing any acts in furtherance of collecting on a debt owed from prior to the petition. This is called the “discharge injunction,” and, similar to the automatic stay, any violation of the discharge injunction can result in heavy fines and sanctions for the offending creditor.
Who is Still Responsible for the Debt?
As mentioned above, discharge does not extinguish a debt from existence. When a debt is discharged, the creditor is still owed money. If the bankruptcy debtor is the only party who owed that money, it is incredibly unlikely the creditor will receive any payment for the debt. However, if there is a co-signer on a loan, a personal guarantor, or an alter ego of the debtor, that party will still be liable.
In general, a co-signer is a party that agrees to be liable on a debt in the event a debtor fails to make payment. Normally, a party with little credit or a bad credit score will require a co-signer on certain loans. This is often a family member or close friend with better credit to ensure the debt is eventually paid. In these instances, the co-signer will still be responsible for the debt even once the debtor is discharged.
A personal guarantee is often made by business owners on certain contracts or agreements. For example, a loan from the Small Business Association often requires a business owner to sign a personal guarantee. These personal guarantees ensure a lender that, should the business not make its payments, the personal guarantor will. This is often seen in chapter 7 business bankruptcies, where the business is unsuccessful and the owner is now required to repay the guaranteed debt.
Alter ego situations are much less common than the above, but still very important. Creating a business often creates a shield from liability for the owner of the business. This means that the owner of a business is usually not going to be held personally liable for actions or debts that belong to the business itself. this shield is often referred to as the “corporate veil.” A creditor can pierce that corporate veil only when the creditor can demonstrate that the owner and the company are essentially alter egos of each other. This often means the owner used company funds for personal expenses, commingled funds that belonged to the company and the owner, or generally failed to separate the owner from the business itself. Under these circumstances, a business owner could still be held liable for the debts incurred by the business.
If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and present you with potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.
