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Discharge: Outcomes for Debt in Bankruptcy
Adam Mack, J.D.
What happens to my debts when I file bankruptcy?
When a person is evaluating whether bankruptcy is the best option for them or not, a critical question is what will happen to their debts as a result of filing bankruptcy. Generally speaking, there is one of five outcomes for each debt. It will be discharged or reaffirmed, a lien against it might be avoided, the security might be redeemed, or it will continue as a "non-dischargeable" debt. Each result has different requirements, implications and options, and so it's important to have a qualified attorney help you determine which ones are the best for you.
Technically, almost all debts are discharged once you file bankruptcy, and the rest of the debt outcomes are modifications of that discharge. For simplicity, though, we'll use the term "discharge" to mean the permanent, unmodified discharge applied to a debt at the end of the bankruptcy proceedings.
A permanent discharge is by far the most common outcome for debts in bankruptcy. When a debt is discharged, three things happen: any current legal judgment against that debt gets "voided" (made unenforceable), creditors are prevented from making any efforts to collect the debt (including current or threatened court action), and your future assets are protected from anyone trying to collect the debt. Basically, your creditors can't collect and your obligation to pay the debt is wiped out.
Some debts are "secured," meaning that some kind of property is attached to the debt. Common examples of secured debts include car loans and mortgages. In many cases, people filing bankruptcy will want to keep their house or car; in order to do that, they may have to "reaffirm" their car loan or mortgage using what's called a reaffirmation agreement. For just that one debt, it's as if you never filed bankruptcy. The bank can keep collecting against the loan, and you keep making your payments, so you get to keep the property (as long as you abide by the terms of the reaffirmation agreement). You never have to reaffirm a debt, but a creditor doesn't have to accept your reaffirmation, either. It's something that must be negotiated between the two of you since it's essentially a new contract, and it's almost always in your best interest to be represented by an attorney during that process. If a secured debt is not reaffirmed, the results may be mixed. The property securing the debt may be repossessed or the creditor may choose to do nothing. The likely outcome will depend on a host of different factors and should be discussed with your attorney.
Redemption is also sometimes used with secured debts, especially liens (which are a specialized form of secured debt). In redemption, the creditor or lienholder agrees to let you pay the resale value of the property securing the debt and then keep the property. The reason a creditor might allow this is because the process of repossessing, storing, and then reselling the property might involve more cost than the property itself is worth. In that case, it's cheaper for the creditor to just let you pay the resale price for the property. Most often, redemptions are used for things that don't have a high resale value or that are difficult to move, such as furniture bought with a secured loan.
There are a few caveats, though. First, the property you want to redeem has to be removed from the bankruptcy estate, either by you claiming the property as exempt or by the bankruptcy trustee "abandoning" the property, or in other words, deciding that the property shouldn't be included in the bankruptcy estate (usually because the property's value is inconsequential). Once the property is abandoned or exempt, you can approach the lienholder about the possibility of redeeming the property.
The lienholder is under no obligation to allow you to redeem the property, and you and the creditor might disagree as to how much the property is worth. A qualified bankruptcy attorney can help you negotiate with a lienholder regarding both the option and cost of redeeming any property you'd like to keep.