Discharge in Bankruptcy

Definition

Discharge in Bankruptcy is the release of a debtor from their legal obligation to pay certain types of debts following bankruptcy proceedings. This release frees the debtor from most of their provable debts, except for those liabilities that are exempt from discharge under bankruptcy laws. The discharge may be automatic in some cases or might require an application to the court, with the potential imposition of conditions such as future payments from the debtor’s income to creditors or suspension until the creditors receive a higher portion of the owed amount.

Key Elements:

Release from Debts: Upon discharge, the debtor is no longer legally required to pay the discharged debts.
Conditions: The discharge may come with conditions like additional payments or suspension pending greater creditor compensation.
Court Application: In non-automatic cases, the debtor or official receiver must apply to the court for an order of discharge.
Exemptions: Certain debts are typically not discharged, including child support, alimony, and some tax obligations.

Examples

Automatic Discharge: John declares bankruptcy and, after the standard period passes, receives an automatic discharge, freeing him from most unsecured debts without needing to apply through the court.
Court-Ordered Discharge with Conditions: Jane files for bankruptcy, and the official receiver applies to the court for an order of discharge. The court conditions the discharge on Jane making payments from her future income for five years to her creditors.
Partial Discharge: David’s bankruptcy results in a partial discharge. Some of his debts are forgiven, but he remains obligated to pay specific nondischargeable debts, such as student loans.

Frequently Asked Questions (FAQs)

1. What debts are typically not discharged in bankruptcy?

Most tax obligations, alimony, child support, and student loans are commonly nondischargeable under bankruptcy laws.

2. What happens to the debtor after discharge?

The debtor is relieved from the obligation to pay off discharged debts and can start rebuilding their financial health.

3. Can the discharge be revoked?

Yes, a bankruptcy discharge can be revoked under certain circumstances, such as if the debtor committed fraud during the bankruptcy process.

4. Is a court hearing always required for discharge?

No, in some cases, discharge can be automatic, but a court application is necessary in others.

5. Does discharge affect the debtor’s credit score?

Yes, a bankruptcy discharge will typically lower the debtor’s credit score, though it marks a starting point for eventual recovery.

Bankruptcy: A legal procedure involving a person or business that is unable to repay their outstanding debts.
Official Receiver: A person appointed by the court to manage the process of a bankruptcy or an estate.
Order of Discharge: A court order that formally releases a debtor from debt obligations.
Undischarged Bankrupt: A bankrupt individual who has not yet received a discharge and remains under certain financial disabilities and restrictions.

Online References

Accounting Basics: “Discharge in Bankruptcy” Fundamentals Quiz

### What is a bankruptcy discharge? - [x] Release of a debtor from obligation to pay certain types of debts - [ ] Total forgiveness of all debts regardless of conditions - [ ] A court order to close all the debtor’s bank accounts - [ ] A removal from debtor’s financial records > **Explanation:** A bankruptcy discharge is the release of a debtor from the legal obligation to pay certain types of debts, providing a fresh start post-bankruptcy proceedings. ### Is a bankruptcy discharge automatic in all cases? - [ ] Yes - [ ] No, it always requires a court hearing - [x] No, it can be automatic in some cases - [ ] Yes, except for corporate bankruptcies > **Explanation:** Bankruptcy discharge can be automatic in some cases, but in others, the debtor or the official receiver must apply to the court for an order of discharge. ### Which debts are usually not discharged in a bankruptcy? - [ ] All unsecured debts - [x] Child support and alimony - [ ] Credit card debts - [ ] Medical expenses > **Explanation:** Generally, child support, alimony, and certain tax obligations are not discharged during bankruptcy proceedings. ### What is an "official receiver" in bankruptcy terms? - [ ] A debt collector from a bank - [x] A person appointed by the court to manage the bankruptcy process - [ ] An accountant assigned to create the final report for the debtor - [ ] An internal auditor reviewing the debtor’s financial records > **Explanation:** An official receiver is a person appointed by the court to manage the bankruptcy process or estate. ### What could a court-ordered discharge require? - [ ] Full repayment of all debts - [ ] No special requirements ever - [x] Conditions such as future payments from the debtor - [ ] Immediate clearance of the debtor’s credit record > **Explanation:** A court-ordered discharge may come with conditions including future payments by the debtor to their creditors. ### Can a bankruptcy discharge be revoked? - [x] Yes, if fraud is discovered - [ ] No, it is always permanent - [ ] Yes, but only by the debtor’s request - [ ] No, once granted it impacts cannot be changed > **Explanation:** A bankruptcy discharge can be revoked if it is found that the debtor committed fraud or violated specific bankruptcy laws during the process. ### What limitation does an undischarged bankrupt face? - [ ] They are entirely free from debt obligations - [x] They remain under financial disabilities and restrictions - [ ] They have complete financial freedom - [ ] They can incur unlimited new debts > **Explanation:** An undischarged bankrupt still faces certain financial disabilities and restrictions until they receive a discharge. ### What is the primary benefit of receiving a bankruptcy discharge? - [ ] It provides immediate monetary gain - [x] It offers a fresh start by relieving debt obligations - [ ] It allows purchase of new properties without limits - [ ] It negates the need for future financial planning > **Explanation:** The primary benefit of a bankruptcy discharge is that it offers a fresh start by relieving the debtor from their legal obligation to pay off certain debts. ### How does discharge impact a debtor's credit score? - [ ] It improves it immediately - [x] It typically lowers it but marks a starting point for recovery - [ ] It has no impact - [ ] It resets it to the initial value > **Explanation:** While a bankruptcy discharge typically lowers a debtor’s credit score, it allows them to begin rebuilding their financial credibility. ### What entity generally provides an allowance for the normal wear and tear on a piece of property during bankruptcy? - [ ] Business creditors - [ ] Local municipalities - [ ] Personal financial advisors - [x] The Internal Revenue Service (IRS) > **Explanation:** The IRS may offer allowances for the normal wear and tear of property subject to depreciation during business bankruptcies, though this is more related to business assets rather than discharge of personal debts.

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