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Discharge of debtor is a legal term used in bankruptcy or insolvency proceedings. Under various debt law statutes, when a debtor can no longer pay creditors, the legal system provides a means of canceling the debt and discharging the debtor from further financial obligation. The process for obtaining a discharge of debtor, as well as terms used to describe such a discharge, vary from country to country and jurisdiction to jurisdiction. Legally, discharge of debtor can also mean the release of a debtor by the courts upon completion of specific conditions set forth in bankruptcy or insolvency hearings.
Although debt law varies, generally a discharge of debtor relieves an individual or business of financial liability, as well as eliminating all rights of named creditors regarding collection of named debts. Insolvency or bankruptcy courts issue a permanent court order barring further action by a creditor against a debtor. Rights surrendered by creditors include the right to future collection actions, the right to sell the debt to a debt collection agency, the right to take legal action against an individual debtor for uncollected monies, as well as preventing future communication with debtors regarding a discharged debt.
Most courts involved in the insolvency of businesses or individuals, regardless of jurisdiction, require debtors to follow specific financial instructions during court proceedings. Such requirements may last for several weeks or months, depending on the complexity of a particular case and local debt law. Until such time as the court is satisfied that the debtor has reported all assets and debts and until such time as future financial plans, asset distributions, and discharges are approved, the debtor is obligated to follow all court instructions, guidelines, requests, and requirements. Once satisfied, the court may issue a discharge of debtor, which allows an individual or business to resume normal financial operations, including applying for credit, making purchases, or liquidating remaining assets.
In the United States, federal bankruptcy proceedings allow for the discharge of debtor for certain types of financial obligations. A person who files for bankruptcy protection under federal guidelines must choose one of several types of bankruptcy protection. Not all proceedings allow for the complete discharge of all debts. For example, Chapter 7 eliminates all but certain types of debt, such as federal student loans, alimony, or child support. Alternatively, Chapter 11 and Chapter 13 bankruptcies do not erase debt, but rather allow individuals and businesses to restructure debt.
European countries such as France, Spain, England, and Italy have slightly different laws regarding discharge of debtor. Businesses, for example, are often liquidated completely to satisfy debts, rather than simply discharging a debtor's obligation to repay a debt. Around 2005, several European countries began reforming insolvency proceedings, with some allowing for debt discharges without the seizure of assets in an effort to protect jobs and economically viable businesses. Few changes were made to insolvency proceedings for individuals.
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