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In a bankruptcy case, bankruptcy discharge means a judge has declared that youre no longer responsible for paying debts. Its a permanent action that affects some, but not all, types of debt.
Even though a discharge wipes out certain debts and can help get your finances in order, the bankruptcy remains on your credit report for seven or 10 years, depending on the kind of bankruptcy.
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A bankruptcy discharge permanently prevents a creditor from trying to collect discharged debts. A discharge can happen in four types of bankruptcy cases:
Bankruptcy discharge applies only to debts you accumulated before filing for bankruptcy.
According to the United States Department of Justice, its important to list all of your property and debts in bankruptcy documents. If you fail to mention a debt, a judge may not discharge it. Also, a judge might refuse to discharge a debt if, for instance, you hide property or falsify records.
A Chapter 7 bankruptcy filer typically gets an automatic discharge of eligible debts, such as credit card bills, unless legal challenges have been raised about a requested discharge. Meanwhile, debts included in a Chapter 13 bankruptcy can be discharged, but normally arent since this type of bankruptcy generally involves debt restructuring. Chapter 7 and Chapter 13 are the two most common types of bankruptcy.
In a Chapter 7 bankruptcy case, a discharge can take four to six months. In other bankruptcy cases, including Chapter 13, payments are often made over a three- to five-year period, so typically, a discharge takes around four years.
An array of debts can be discharged in a bankruptcy case. Some of these include:
Not all debts can be discharged in a bankruptcy case. Some of the debts exempt from discharge include:
A judge can deny a bankruptcy discharge for several reasons, such as:
You might be able to get federal and private student loan debt discharged if the bankruptcy court approves your request through whats known as an adversary proceeding. In this request, a Chapter 7 or Chapter 13 bankruptcy filer states that student loan debt repayment would cause financial hardship for them and their dependents.
Positive scenarios that might arise from a hardship filing include:
In 2021, the American Bar Association, a group for lawyers and law students, urged Congress to change the U.S. Bankruptcy Code to give borrowers the ability to discharge student loans without proving that repayment of the debt would impose an undue hardship on them or their dependents.
The proposed federal Fresh Start Through Bankruptcy Act of 2021 would make federal student loans eligible for discharge in a bankruptcy case 10 years after the first loan payment is due. Furthermore, the act would retain the current undue hardship discharge option for private student loans and for federal student loans that have been due for less than 10 years.
Student loan debt follows you to your grave. For years, I have supported allowing struggling borrowers to discharge their loans in bankruptcy as a last resort, said U.S. Sen. Dick Durbin, D-Illinois, a co-sponsor of the Fresh Start legislation, in a press release.
Debt collectors cant try to collect debts that have been discharged in a bankruptcy case. In addition, debt collectors arent permitted to attempt debt collection while a bankruptcy case is pending.
If you believe a creditor has violated the courts prohibition of contacting you about a discharged debt, consider asking an attorney about your legal options. If a creditor tries to collect on a discharged debt, a debtor can report this to the bankruptcy court and request that their case be reexamined. A judge can punish a creditor whos found to have violated the no-contact rule.
When it comes to bankruptcy, a discharge is a good thing. On the other hand, a dismissal may not be such a good thing.
A discharge in a bankruptcy case means all allowed debts have been forgiven. Meanwhile, a dismissal refers to your cases being booted by a bankruptcy court. Reasons that your case might be dismissed include failing to submit the proper paperwork, failing to provide requested documentation or show up for a court appearance, or seeking a type of bankruptcy that doesnt apply to you.
Both a bankruptcy filing and bankruptcy discharge can hurt your credit. Thats because the bankruptcy filing and discharged debts can stay on your credit report for seven or 10 years. However, a debt showing up on your credit report as discharged may be less harmful than an unpaid debt that lingers indefinitely on your credit report.
A Chapter 7 bankruptcy falls off your credit report after 10 years. For Chapter 13 bankruptcy, its seven years.
Keep in mind that a discharged debt might not appear on your credit report as being discharged. If you notice a discharged debt is incorrectly categorized on a credit report, notify the credit bureau that produced the report and ask that the error be corrected. Each year, you can obtain a free credit report from the three major credit bureaus (Equifax, Experian and TransUnion) through annualcreditreport.com.
Fortunately, if you handle your credit responsibly after completing the bankruptcy process, the impact of the bankruptcy on your credit score will fade over time. You may even see improvement in your credit score within 12 months of a bankruptcy cases being wrapped up.
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