How are debts classified in bankruptcy?

Debts are divided into two categories: dischargeable and non-dischargeable. Dischargeable debts are those that the debtor is no longer personally liable to pay after the bankruptcy proceedings are concluded. Non-dischargeable debts are those that are not canceled because of the bankruptcy proceeding. This means that you are still responsible for paying, whether you declare or do not declare bankruptcy.

What is a "discharge" in bankruptcy?

A "discharge" in bankruptcy means that you are legally free and clear of any obligation to repay certain debts; they are gone. The creditor no longer has any right to collect debt. The debtor no longer has any obligation to repay it.

The timing of the discharge varies, depending on the chapter under which you file. In a Chapter 7 bankruptcy, for example, you normally receive a discharge just a few months after the petition is filed. In a Chapter 13 bankruptcy, the discharge typically occurs when you have successfully finished the repayments.

Can all debts be discharged in bankruptcy?

No. That is why it is so important to consult with a bankruptcy attorney. Depending on your circumstances bankruptcy may or may not make sense for you. If after the bankruptcy you will be no better off then you were before, why do it?

Which debts are discharged in bankruptcy?

The most common debts that you may get rid of are:

- back rent
- utility bills
- some court judgments
- credit and charge card bills
- department store and gasoline company bills
- loans from family and friends
- newspaper and magazine subscriptions
- legal, medical and accounting bills
- most unsecured loans (e.g., debts for which there is no collateral)

Which debts are not discharged in bankrutpcy?

- In general, liens (such as mortgages and security interests in cars) are non-dischargeable as are some other types of obligations including:
- Federal, state and local tax claims (subject to specific time rules)
- Customs duties
- Spousal support
- Child support
- Most student loans
- Secured debts
- Fines and penalties imposed by government agencies
- Debts incurred due to false statements made with the intent to deceive
- Fraud committed in a fiduciary capacity, such as embezzlement or larceny
- Punitive damage claims for "willful and malicious" acts
- Debts not list on the forms filed with the Court
- Drunk driving obligations

A non-dischargeable debt is one that will survive the bankruptcy proceeding. The debtor still has the obligation to pay this debt; the creditor has every right to collect.

Suppose the bankrupt committed fraud - would the debts be discharged in bankruptcy?

No. The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, carrying forth a basic policy of affording relief only to an "honest but unfortunate debtor."

Congress did not favor giving perpetrators of fraud a fresh start (by allowing them to wipe out their debts in bankruptcy) over the interest in protecting victims of fraud when it wrote the Bankruptcy Laws. Accordingly, Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in bankruptcy "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A).

Can a creditor ask a debtor to reaffirm the debt?

Yes, this means that the creditor is asking that the debtor pay the debt anyway, even after it has been discharged. A debtor may be willing to do this if there is a co-signer or guarantor of the debt (such as a family member, friend or employer) that the debtor does not wish to leave saddled with the debt. Also, a debtor may want to reaffirm a debt in order to avoid having a secured creditor take the collateral provided for the debt. A creditor may also ask a debtor to reaffirm the debt before he (the creditor) will agree to do business with the debtor again.