Worried clients ask me this all the time, fearful that the relief they get from their creditors in bankruptcy is only temporary.
The short answer is no.
Debt that is discharged, wiped out, in your bankruptcy case is gone as a legal liability forever.
The automatic stay that stops collectors when you file bankruptcy is replaced, at the end of the case, with the discharge injunction.
But then, this is law, so nothing is quite that simple.
The bankruptcy discharge eliminates your personal liability for dischargeable debts.
If there is no personal liability, your former creditor can’t sue you for money and get a judgment that allows it to levy your assets or garnish your wages.
Was the debt discharged
Bankruptcy law carves out some debts that aren’t discharged in bankruptcy. They have to be listed in your bankruptcy schedules, but just because they are listed doesn’t mean they go away.
Debts that can’t be discharged include child support, recent taxes, judgments for personal injury caused by drunk driving.
Unfortunately, the discharge order that is issued by the court at the end of a bankruptcy case doesn’t list the debts that are discharged. It just says that the dischargeable debts are gone.
Is there a lien
The bankruptcy discharge wipes out the personal liability for a debt. But liens that have attached to assets before the bankruptcy remain as a charge against those assets.
Put another way, the lien survives the bankruptcy.
Or, it survives unless you get a bankruptcy court order that avoids the lien because it impairs an exemption you claimed in the bankruptcy case.
You need to file a motion to make that avoidance happen. Which means you need to tell your bankruptcy lawyer that your creditor may have gotten a judgment and a judgment lien before your bankruptcy case was filed.
Does the creditor know you got a discharge
The reason that the bankruptcy paperwork requires that you list all your creditors with good mailing addresses is so they get the word when your discharge is entered. Notice to creditors is also about due process: remember from civics?
Creditors get notice so they can participate in the bankruptcy if there were to be a payment to creditors and so they can protest if they have grounds to think you shouldn’t get a discharge.
Once you get a discharge, the court mails a copy of the court’s order to everyone on the list of creditors you assembled at the beginning of the case.
A creditor left off the list, or to whom a debt is transferred after the bankruptcy filing, has no way of knowing that you’ve discharged your debts.
Notice of the bankruptcy isn’t everything
While the Bankruptcy Code says creditors who didn’t get notice of the bankruptcy case have a continuing claim against a debtor, courts have hedged that part of the law.
In the 9th Circuit, which includes California, a creditor with a straightforward dischargeable claim has that claim discharged even without notice, where the bankruptcy case provided no distribution to creditors. That’s the holding of Beezley.
Note then that in a no asset Chapter 7, where no creditor gets any money as a result of the bankruptcy, a creditor without notice gets wiped out.
But in Chapter 13, where there might be a tiny distribution to unsecured creditors, the creditor without notice keeps his claim.
So, the rule is: the debtor’s personal liability for a dischargeable claim is wiped out forever, if the creditor got notice or if there was no payment to creditors in the case.
Next time we’ll address what to do when you are contacted about a claim that has been discharged.
Image courtesy of Flickr and Joe Shlabotnik.