What Happens to Discharged Debt in Bankruptcy?

The bankruptcy discharge is the core benefit of a Chapter 7 bankruptcy, and some unsecured debt can also be discharged in a Chapter 13 case.

Discharging debt can offer significant benefits for Los Angeles residents: the city ranks in the top five nationally for average credit card debt, and 10% of households in Los Angeles County have at least one medical bill in collections. Credit card debt and medical bills are among the most common debts discharged in consumer bankruptcy cases.

But, many people considering bankruptcy don’t fully understand what it means for debt to be discharged in bankruptcy. Here’s what you should know about discharged debt:

When a debt has been discharged in bankruptcy, you are no longer legally obligated to pay that debt.

The bankruptcy discharge order prohibits creditors and debt collectors from attempting to collect discharged debt. That’s true even if the creditor or collector has already obtained a judgment. Some creditors and debt collectors will ignore this order or mistakenly contact you after bankruptcy, but you do not have to pay discharged debt. And, transferring the debt to a new debt collector or selling it to a debt buyer who wasn’t listed in the bankruptcy doesn’t bring the debt back to life–though some debt buyers may try to tell you that it does. If a creditor or collector pursues payment of the debt after discharge, they are violating a court order and can be sanctioned.

Debts are only discharged as to the person filing bankruptcy.

The discharge of the obligation to pay a debt relates only to the bankruptcy petitioner–it doesn’t necessarily make the debt itself disappear. Discharge of this personal obligation doesn’t impact any security interest in property and it doesn’t excuse anyone else who may be obligated on the debt. For instance, if your brother co-signed for a personal loan and you discharge the loan in bankruptcy, your brother will remain responsible for paying the outstanding balance on the loan and any fees and interest that accrue under the contract. However, because California is a community property state, the spouse of the debtor does get some protection from the discharge, in that community property is off limits for collection purposes. 

Creditors shouldn’t issue a 1099-C for discharged debt.

When a creditor writes off money you owe, the creditor is often entitled to issue you a 1099-C. Since being freed from the debt is a gain to you, the IRS views it as income. But, the IRS does not consider debt discharged in a consumer bankruptcy case to be taxable income. So, you should not be issued a 1099-C. If you do receive one, the IRS has a form you can submit with your taxes to avoid being taxed on the “gain.”

Discharged debts can’t be reported to credit bureaus as delinquent or outstanding.

Once a debt has been discharged in bankruptcy, there is no outstanding balance and no payment due. Therefore, creditors and debt collectors cannot continue to report an outstanding balance or show continuing past-due payments. Still, many do. It’s important to monitor your credit reports after bankruptcy and dispute any discharged debt that is being misreported. You’ll want to continue to monitor at intervals, as erroneous information that has been removed from your credit report sometimes reappears in a later reporting cycle.

It’s the bankruptcy filing, not discharge, that determines how long the case stays on your credit report.

One significant concern many people have about bankruptcy is that it can have a negative impact on credit. A Chapter 7 bankruptcy case typically stays on your credit report for 10 years, and a Chapter 13 case for seven years. But, that countdown starts when the bankruptcy petition is filed, not when you receive a discharge. If the case is dismissed without discharge, whether voluntarily or by the court, the filing remains on your credit report for seven or 10 years. 

Making the Most of Your Bankruptcy Discharge

A bankruptcy discharge can be a powerful tool for wiping the slate clean and rebuilding your finances after a serious setback, or a long period of juggling bills and trying in vain to catch up and build a solid financial foundation. But, to take full advantage of the benefits of a bankruptcy discharge, it’s important to understand exactly what you can expect and know how to respond if something doesn’t play out as it should. 

That means:

• Keeping a copy of your discharge order handy and promptly responding with proof of discharge if you receive collection calls or notices on discharged debt–many people who reach the point of bankruptcy have gotten in the habit of dodging calls from debt collectors and ignoring collection letters, but at this point, the power is in your hands. 
• Contacting your bankruptcy attorney if a creditor or debt collector persists in pursuing collection after you’ve provided a copy of your discharge order–sometimes, collection efforts after discharge are honest mistakes, but if collection efforts continue, the collector may be subject to sanctions.
•  Monitoring your credit report and disputing any discharged items that are being reported with an outstanding balance or continuing to accrue past-due months.

To learn more about how a bankruptcy discharge could help you make a fresh financial start, schedule a free consultation with Borowitz & Clark. Just call 877-439-9717 or fill out the contact form on this page.