When a company decides to declare itself bankrupt it needs to file a petition under the chapter 7, that petition, later on, will become a discharge. The term discharge can be unknown to some, for this reason, we will explain it in detail in this article.

A discharge is an official list of the debts your company currently has and won’t need to be repaid according to a court’s will. These debts are then considered as exceptions when a company decides to file for bankruptcy. However, there are some debts that won’t be discharged, such as taxes, fines, or debts derived from fraud.

Filing under chapter 7 doesn’t’ necessarily mean that discharge will concede to your company. However, if your company is allowed to discharge its debts, creditors won’t have the chance to ask you to pay for the money your company owes them. It is important to notice that, companies can only receive a discharge derived from the chapter 7 once every six years.

How does a discharge in bankruptcy work?

In very simple words, a bankruptcy discharge is a legal permission a court gives to any given company to avoid paying its debts after filing for the chapter 7. The debtor is released from its obligation to pay to creditors.

After the discharge is given to a company, creditors can’t ask the debtor to pay. This means that they won’t be legally allowed to execute any type of collecting action or send any type of communication (phone calls, emails, letters, etc.) to the company.

It is important to notice that if the creditor has already secured a property that belongs to the company through a lien, this debt won’t’ be discharged. This means that the debt with this particular creditor will remain even after the company files bankruptcy under the Chapter 7.

When does the discharge take place?

All discharges may take place in different moments, according to the chapter under which a company filed for bankruptcy. However, when the process takes place under the chapter 7, it means that the company is going to be liquidated. Therefore, courts usually give discharges in a period of time that can take up to four months after the company filed the petition in the bankruptcy court.

When the discharge petition takes place under other types of chapters (such as 11, 12 or 13), courts tend to give the discharge faster, since the company or debtor will need to complete its payments under a defined plan, which can take up to 5 years to be completed.

How can companies get a discharge?

Unless someone complains and runs a litigation process against the filing for bankruptcy, companies will always get a discharge. The regular procedure implies that the bankruptcy court in the head of the bankruptcy clerk will mail a copy of the order of discharge to all the organizations and individuals to which the bankrupt company owes money. Sometimes, lawyers will be the one receiving this letter; this happens especially in the case of trustees.

The company who filed for bankruptcy will also get a copy of this discharge order. Then it will get the final copy of the discharge in which all creditor will be listed – including those who are not covered by the discharge.

The discharge order is known as a notice, and it informs creditors that from now on they won’t be allowed to execute any type of collecting action against the company. They are warned in this notice that If they continue to try to collect money from the company they could be subject to a punishment (like a fine).

Image courtesy of amy_kearns at Flickr.com

It is very important for the clerk to send this notice in time and to both the company and the creditors. This way, the discharge will promptly start functioning and won’t be affected by the misconducted actions of any of the involved parties.

Also, it is valid to notice that not all debts could be discharged. Debts that can be discharged should not be derived from the company’s bad behavior against the public law. In this situation, fines won’t be dischargeable, neither will be taxes or social obligations. Most exceptions of the debts that can be discharged are usually listed right next to each chapter in which bankruptcy can be filed under.

Can creditors object the discharge?

If a company files for bankruptcy under the Chapter 7, creditors will have the right to object or complaint against the discharge application. This objection will need to be properly filed by the creditor with the help of an attorney. Also, this complaint will need to be delivered before the expiration date passes. Otherwise, the complaint won’t be valid or processed by the bankruptcy court. Most complaints against the discharge petition are filed and processed in the form of lawsuits.

Related: 4 things every company needs to cope with bankruptcy by Suzzanne Uhland

* Featured Image courtesy of Andy Kiel at Flickr.com