Everyone Deserves a Second Chance
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Making Sense of Bankruptcy: How Can Bankruptcy Write Off My Debts?

If I legally owe debts, and maybe even have a court judgment saying I do, how can bankruptcy wipe away those debts and erase that judgment?

Here’s the sentence that we’re explaining today:

If you are legally obligated to pay a debt, and even if you have had a court confirm that you owe the debt through a judgment in favor of the creditor against you, filing a consumer bankruptcy case and going through the necessary steps to successfully complete the process, results in the “discharge” of that debt forbidding the creditor from ever collecting it.

The Legal Obligation to Pay a Debt

For an obligation to pay a debt to be legally enforceable it has to meet certain standards of contract law which are mostly governed by state laws. For most consumer debts there is little doubt that you are indeed legally obligated. If you signed up for a credit card or store card and used the card, if you received medical services, if you asked for and signed the promissory note for a personal loan or for a vehicle, if you purchased a home and signed the reams of paperwork to finance it—in all of these and countless similar situations you and the creditor very likely went through the steps to make you legally liable to pay the debt.

There are occasional situations when the creditor and you did not go through the necessary steps, or for some reason you have a defense, a reason that you don’t owe the debt. For example, certain debt agreements must be in writing or else they are not legally enforceable. You may have a moral obligation to pay, but not a legal one under state law. If you have any doubt it may be worth asking an attorney. But again with most conventional consumer debts you are likely legally liable on all or at least most of your debts.

A Judgment Legally Confirming and Enforcing the Debt Against You

When a creditor sues you it is asking the court—almost always a state court—to agree that the debt is a legally valid and enforceable one. The Complaint the creditor’s attorney files in court lays out the reasons the debt is valid. Most of the time the allegations in a Complaint are accurate and do indeed state why the debt is a legally enforceable one. Most of the time the debtor has no legal defenses to raise. So not surprisingly the vast majority of the time, the debtor does not respond to the Complaint. And so, after a legally proscribed period of time, the creditor wins the lawsuit by default. It gets confirmation that the debt is a legally enforceable one with the court entering a judgment in its favor against you, stating that you owe the debt, and specifying the amount owed. That amount usually is significantly increased by whatever penalties and interest the creditor is entitled to, as well as likely the attorney fees and costs it incurred in bringing the lawsuit (if your agreement allows for these, as they often do).

It’s worth noting that because creditors win most debt collection lawsuits by default, with the court essentially rubber-stamping whatever the creditor asks for, creditors get judgments when they shouldn’t. The debtors would have won had they known that they had a defense, a reason that the debt is not legally enforceable, and had they raised the defense on time.

An example of a defense is a “statute of limitations.” That is a law which provides a certain amount of time within which a debt can be legally enforced—usually a certain set number of years. Once that period of time expires if a creditor tries to collect the debt, the debtor can raise this defense. Then, assuming that the applicable “statute of limitation” has in fact expired, the court will “dismiss the lawsuit with prejudice,” meaning that it will throw out the lawsuit and forbid it from being ever filed again.

But once a judgment has been entered it’s usually too late: a state court has confirmed that the debt is legally owed and enforceable, and the creditor can start enforcing the judgement, often through the help of the court, such as by getting the court to issue an order of garnishment of your wages and/or bank accounts.

Filing a Consumer Bankruptcy Case

Bankruptcy is more powerful than all that, because, through its “automatic stay,” it can immediately stop virtually all collection actions, both preventing judgments from happening and stopping the enforcement of those judgments that have already been entered against you. And then bankruptcy provides for the write-off—the “discharge”—of most types of consumer debts which would otherwise be enforceable under state law, including those debts that a state court has already explicitly determined are enforceable through judgments so stating.

How can bankruptcy do all this? It can because the U.S. Constitution says it can, in two respects.

First, the Constitution explicitly gave the federal government, through Congress, the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.” See Article 1, Section 8, Clause 4.

Second, the Constitution, through the Supremacy Clause in Article Six, Clause 2 made “the laws of the United States… the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.”

Must Successfully Complete the Case

So Congress wrote the bankruptcy laws, and occasionally adjusts these laws. These laws say what you must do to get the benefits of bankruptcy, including the “automatic stay,” immediately but temporarily stopping almost all collections, and the “discharge,” permanently getting rid of most of your debts.

You get the “automatic stay” by just having your attorney start your bankruptcy case. But to get a “discharge” you need to complete your case successfully. Doing so just means going through the procedures and doing what you are supposed to do. That’s usually relatively easy in a Chapter 7 “straight bankruptcy” case—the vast majority of these cases result in a “discharge” of debts within about 4 months after filing. Chapter 13 “adjustment of debts” has a lower success rate, both because they last so much longer—3 to 5 years—and because debtors have many more obligations to fulfill during that time.

The “Discharge” Forever Prevents the Collection of the Debt

But either way, the “discharge” of debt in bankruptcy imposes a federal injunction against the collection of any discharged debt. The “discharge” also “voids any judgment.” The debt, with or without a judgment behind it, is dead in the water thereafter.