When a debt is discharged through bankruptcy, the debtor is released from personal liability for the debt. In other words, the debtor is no longer legally required to repay the debt. The discharge also prohibits most creditors from taking any sort of collection action, including calls, letters, or personal contact.
Which Debts Can and Can't Be Discharged in Bankruptcy?
The debts that will be discharged in a bankruptcy vary from chapter to chapter of the Bankruptcy Code as well as from case to case. Here's a general overview:
In a Chapter 11 bankruptcy, a business can try to reorganize in the hopes of becoming profitable. This involves coming up with a reorganization plan, which creditors get to vote on. If the plan is approved, then the business must repay its debts according to the plan; any debts not addressed in the reorganization plan will be discharged.
In a Chapter 13 bankruptcy, an individual debtor (or in the case of a small business owner, a sole proprietor) tries to repay most creditors in monthly installments over three to five years. The debtor must have enough income to pay all priority and secured debt in full, and to pay some portion of unsecured debt as well. Some debts like court fees and homeowners' association fees can be discharged under Chapter 13, though they cannot be discharged under Chapter 7.
In a Chapter 7 bankruptcy, an individual debtor typically cannot afford to repay creditors over a three- or five-year period; the debtor's income must also qualify under the "means test." Some of the more common types of debt that can be discharged by a Chapter 7 bankruptcy include credit card debt, utility bills, bad checks, money owed on a lease, court judgments, and older unpaid taxes and penalties. Debts that cannot be discharged include debts to government agencies, more recent taxes, federal tax liens, and any normally dischargeable debt If the creditor successfully challenges the discharge.
Depending on the way your business is formed, your income, and the type of debts you wish to have discharged, you may want to contact an experienced bankruptcy lawyer to determine which type of bankruptcy is best for you and your business.