What Is a Bankruptcy Discharge?

How Does a Bankruptcy Discharge Work?

If you file for bankruptcy protection and fulfill the court's requirements, your eligible debts will be discharged. You will no longer be legally obligated to repay them, and your creditors must stop trying to collect them.

All types of bankruptcy proceedings require completing a credit education course.

Chapter 7 Bankruptcy

To file Chapter 7 bankruptcy, sometimes called a liquidation bankruptcy, you must prove through a means test that your income is below the median for your state, and forfeit any property that can't be exempted under your state laws. A court-appointed trustee will oversee the sale of that property and distribute the proceeds among your creditors.

Debts designated as priority under bankruptcy laws are paid first; any remaining funds will be distributed to the rest of your creditors. Once this process is finished—typically within four to six months—any eligible debts that are still unpaid will be discharged.

Chapter 13 Bankruptcy

If a means test shows that you have enough income to repay all or part of your debts, a Chapter 13 bankruptcy proceeding sets up a payment plan lasting from three to five years. During that time, you make regular fixed payments to a bankruptcy trustee, who distributes the funds among your creditors. If you successfully complete the payment plan, any eligible debts still unpaid at the end of the repayment period will be discharged.

Learn more: Chapter 7 vs. Chapter 13 Bankruptcy

What Debts Can Be Discharged?

Whether a specific debt can be discharged depends on the type of bankruptcy filing and the facts of your case. In general, however, most consumer debts can be discharged through bankruptcy, including:

• Medical bills
• Unpaid balances on credit cards, personal loans and most other unsecured debt
• Loans from friends or family
• Unpaid utility bills
• Attorney fees
• Contractual debts
• Civil court judgments
• Missed rent payments
• Certain unpaid taxes

The following debts can be discharged in Chapter 13 bankruptcy (but not Chapter 7), unless the court rules otherwise:

• Debts for money or property obtained under false pretenses
• Debts for fraud or misappropriation of funds while acting as a fiduciary
• Unpaid restitution or damages awarded in a civil case for willful or malicious actions by the debtor that caused personal injury

Learn more: Things to Consider Before Filing Bankruptcy

What Debts Can't Be Discharged?

Some debts can't be discharged through bankruptcy. These include:

• Unpaid alimony and child support
• Certain unpaid state and federal taxes (typically those less than three years old)
• Federal student loans
• Debts for death or personal injury the debtor caused by operating a motor vehicle while intoxicated or impaired

Depending on the type of bankruptcy filing, other debts may also be nondischargeable.

Chapter 7

Additional nondischargeable debts under Chapter 7 bankruptcy include:

• Debts for certain criminal restitution orders
• Debts for willful and malicious injury the debtor caused to another entity or to the property of another entity

Chapter 13

Additional nondischargeable debts under Chapter 13 bankruptcy include:

• Debts incurred to pay nondischargeable tax obligations
• Debts for willful and malicious injury to property
• Debts arising from property settlements in divorce or marital separation
• Debts for restitution or a criminal fine as part of a criminal conviction

Learn more: Alternatives to Bankruptcy

What Happens After a Bankruptcy Discharge?

When the bankruptcy court issues a discharge order, the court sends a notice to you, your lawyer, the creditors whose debts have been discharged, the trustee overseeing your case and the trustee's lawyer. The notice prohibits creditors from contacting you seeking payment of the discharged debts. If a creditor contacts you after a discharge notice is issued, you can file a court motion to have them sanctioned.

Within a few months of the discharge order, your credit reports should be updated to show zero balances on discharged loan and credit card accounts.

Depending on your loan agreement and local laws, creditors who issued you secured debt—loans or credit using property as collateral, such as mortgage or auto loans—can legally seize that property even after a discharge is issued. If you're worried about this, ask a bankruptcy attorney about reaffirming those debts as part of your bankruptcy before a discharge is finalized.

Reaffirming your debt means you promise to repay the debt; in exchange, the lender lets you keep the property. However, it's important to act fast to protect your property, because you can't reaffirm the debt once a discharge order is issued.

Learn more: What Are the Requirements for Bankruptcy?

How a Bankruptcy Discharge Affects Credit

While a bankruptcy discharge in itself doesn't affect your credit, filing bankruptcy does. Bankruptcy is extremely damaging to your credit scores, sometimes causing a drop of up to 200 points. (The impact may be less dramatic if your score has already dropped due to missed payments, collection accounts and other negative entries that often precede bankruptcy.)

A Chapter 13 bankruptcy remains on your credit report for up to seven years from the date you first file for bankruptcy protection; a Chapter 7 bankruptcy appears for up to 10 years from the filing date. Bankruptcy's effect on your credit score will diminish over time, but some lenders refuse to work with applicants whose credit reports show a bankruptcy, regardless of their credit scores.

Learn more: When Does Bankruptcy Fall Off My Credit Report?

How to Improve Your Credit After Bankruptcy

There are things you can do to start rebuilding your credit as soon as you file bankruptcy.

• Pay your bills on time. Payment history is the single most important factor affecting your credit scores, so it's in your best interest to commit to paying your bills for loans, credit cards and other debts on time. Just one payment that's overdue by 30 days or more can hurt your scores significantly, so consider setting up autopay to avoid missing a payment.
• Get a secured credit card. After filing bankruptcy, old credit cards may be canceled and you may not qualify for new ones—except for secured credit cards. A secured card requires making a cash deposit, typically a few hundred dollars. The deposit serves as the credit limit; if you don't pay your bill, the card issuer can keep it. Using a secured credit card regularly and paying your bills on time each month can help rebuild your credit score.
• Consider a credit-builder loan. Available from some credit unions, online lenders, community banks and lending circles, credit-builder loans are designed to help you save some money while improving your credit. Loans are typically for less than $1,000, with a repayment term that's usually six to 24 months. Instead of giving you the cash, the lender places the loan proceeds in an interest-bearing savings account you can't access. If you make all your payments as agreed, you'll build a positive payment history and receive the money (plus interest) when the loan is paid off.
• Avoid repeating past mistakes. Review the financial missteps that led to bankruptcy and commit to adopting positive habits so you don't end up in trouble again. Working with a certified credit counselor can help you learn to budget, manage your money and escape the paycheck-to-paycheck cycle that may have led to bankruptcy.

Learn more: How to Repair Your Credit

Frequently Asked Questions

The Bottom Line

The decision to file bankruptcy shouldn't be made lightly, but a bankruptcy discharge can give you a fresh start on rebuilding your credit. Three to six months after receiving a bankruptcy discharge, it's a good idea to check your credit reports at the three national credit bureaus (Experian, TransUnion and Equifax) to make sure your discharged accounts are updated accurately. If not, you have the right to dispute the items on your credit report.

Experian's free credit monitoring service can help you track your progress as you begin your journey back to healthy credit. You'll get access to your FICO^® Score^Θ and receive alerts of important changes to your credit report.