A bankruptcy discharge
gives rise to an injunction prohibiting a creditor from attempting to collect most pre-bankruptcy debts as a personal liability of the debtor. 11 USC 524
Table of contents for this topic:
precludes discharge of a claim in bankruptcy. In re Grossman's, Inc.,
607 F.3d 114, 126 (3rd Cir. 2010). But see 11 USC 523
(a)(3) (no "no notice" exception to discharge if no dividend paid to creditors with notice).
While the discharge prevents creditors from attempting to collect, it does not prohibit debtors from voluntarily making payment. 11 USC 524
(f). In addition, debtors may enter into reaffirmation agreements
which except otherwise dischargeable debt from the general discharge.
The types of debts discharged varies between Chapter 7
, Chapter 11
, Chapter 9
, and Chapter 13
. See also
the comparison at Bankruptcy Chapter 7 And Chapter 13 Discharge
A discharge of debt by bankruptcy does not result in taxable income. However, the taxpayer/debtor may be required to reduce certain tax attributes. See 26 USC 108
for more on this topic.
The discharge is an injunction. So a debtor who believes a creditor is violating the discharge should – after attempting to mitigate (by, for example, sending the creditor a cease and desist letter) - request an order to show cause why the creditor should not be held in civil contempt.
Alternatively, consider an action under Fair Debt Collection Practices Act
As a general rule, liens survive bankruptcy. So if your debtor client has a basis to avoid a creditor's lien then you should seek lien relief while the case is still open. More about this at Bankruptcy Lien Avoidance
Because a bankruptcy discharge reduces tax attributes, 26 USC 108
, if your client is considering a sale of assets it may make sense to time the sale to occur before the bankruptcy filing.