How to Discharge Debt, and Is It Worth It?

by Neal Frankle, CFP ®

If you want to know how to discharge debt, understand that the most common way people do this is by filing for bankruptcy.

Once you discharge your debts this way, it’s permanent. That means creditors can’t legally try to collect from you anymore. No more threatening letters or calls. No contact. No nothing.

how to discharge debt

(However, if your creditor gets a lien against your property and it hasn’t been vacated by the bankruptcy proceedings, the lien is still enforceable. That means the creditor can foreclose on your property.)

But don’t break out the champagne just yet.

If you file for chapter 7 bankruptcy, the court will allow your creditors time to file a complaint objecting to the discharge. If the creditor doesn’t file a complaint, the discharge takes effect within four months after you first filed your petition.

In chapter 11 the court discharges your debt after you make the payments you agreed to in the debt payment plan. Since chapter 11 sometimes allows for payments to extend four or five years, the discharge may take some time to take effect.

Once the discharge takes effect, the court clerk mails a copy of the discharge order to all creditors and your attorney. The creditors are told to leave you alone or face contempt of court.

Not all debts are discharged.

Depending on the chapter of bankruptcy code you file under, the debts that aren’t discharged include:

a. Certain tax claims and government fines or penalties.

b. Debts you didn’t list on the schedules filed with the court.

c. Debts for spousal support, child support or alimony.

d. Debts for injuries to others done maliciously.

e. Student loans that are government-funded or guaranteed.

f. Debts for damage you did while driving intoxicated.

g. Debts you owe to some retirement accounts.

However, sometimes you can even overcome these limitations.

If you have debts due to malicious damage to property, debts to pay taxes or divorce payment debts, you might still get a discharge if you have a hardship due to circumstances beyond your control.

Just make sure you don’t blow it. Indeed, the court won’t discharge your debts (or they’ll revoke the discharge they issued) if you:

  • Don’t provide tax documents they require.
  • Don’t complete a course on personal financial management.
  • Do anything to hide or transfer assets in an effort to defraud creditors.

So don’t play games…OK? Even though you may be able to do it, avoid getting your debts discharged. Pay them instead. If you have very high credit card debt for example, consider a credit card alternative or a peer-to-peer lender like Lending Club to reduce your interest rate (for more information, see my Lending Club review).

First, it’s a hit against your Karma not to mention your credit. I personally think the knock to your Karma can be more damaging. The person you owe money to has a family and has obligations just like you.

Even if it’s a big corporation, when you get your debts charged off, the company passes those charge-offs on to recoup their losses. That means others pay higher prices.

In some unique circumstances, getting your debt discharged might be the right thing to do on balance. That’s something you’re going to have to decide. But I think you’ll gain a lot more if you find a way to work out your debts and pay them off. Your self-confidence will soar and that will pay off for you big time down the line.

But if you do end up discharging your debts, just make sure you do everything in your power to be a responsible consumer from now on. That includes getting your budget under control, not falling for financial scams, saving money and cutting your spending.

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