Discharge (of Debts)

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In bankruptcy court, when a debtor being discharged of debts, he will be no longer liable for the debts, and the lender is no longer allowed to make attempts to collect the debts. The court will issue a decision to discharge debts. Court can issue a discharging ruling when the debtor meets the discharging requirements under Chapter 7 or Chapter 11 of federal bankruptcy law, or the ruling can base on a debt canceling.

A canceling of debt happens when the lender agrees that the rest of the debt is forgiven. For example, if the debtor and the lender have signed a “debt cancellation agreement” (DCA), which provides for cancellation of the remaining loan balance in certain conditions (like death, or property being stolen), when they sign the original lending contract, and the cancellation agreement is found by the court as valid, the lender would have to forgive the debt. In this case, the debtor can ask for the court to issue a discharging ruling, to release the future debts. Businesses often have a DCA in a retail installment contract. Some states require the DCA being submitted to certain government agencies to be approved (see this Texas motor vehicle sales finance DCA submission requirement for further details.)

[Last updated in June of 2020 by the Wex Definitions Team]