What Does Section 524 of the Bankruptcy Code Mean?

Section 524 of the U.S. Bankruptcy Code plays a central role in the bankruptcy process. It is a provision designed to provide individuals with a financial fresh start following bankruptcy proceedings. This section ensures that once certain debts are legally eliminated, creditors cannot continue to pursue their collection.

The Core Meaning of Section 524

Section 524 primarily addresses the effect of a bankruptcy discharge, which legally releases a debtor from personal liability for specific debts. The section outlines how this discharge operates, especially concerning the actions creditors can take afterward.

The provisions of Section 524 largely focus on two main components: the discharge injunction and reaffirmation agreements. The discharge injunction acts as a permanent court order, preventing creditors from attempting to collect discharged debts. Conversely, reaffirmation agreements provide a voluntary mechanism for debtors to choose to repay certain debts that would otherwise be discharged, often to retain secured property.

The Discharge Injunction

The discharge injunction, established under Section 524, is a permanent court order that takes effect upon a debtor’s discharge. This injunction prohibits creditors from taking any action to collect a discharged debt from the debtor personally.

Prohibited actions include:
Making phone calls
Sending letters
Filing lawsuits
Garnishing wages related to discharged debts
Reporting discharged debts to credit bureaus
Attempting to offset them against property of the debtor acquired after the bankruptcy filing

This protection is broad, extending even to creditors who may not have been formally notified of the bankruptcy, though specific exceptions can apply.

The discharge injunction is automatic once a discharge order is entered. Violations of this injunction can lead to serious consequences for creditors. A bankruptcy court can hold a creditor in civil contempt, potentially imposing monetary penalties such as actual damages and attorney’s fees.

Reaffirmation Agreements

A reaffirmation agreement is a voluntary contract between a debtor and a creditor to repay a debt that would typically be discharged in bankruptcy. This agreement makes the debtor personally liable for the debt again, essentially waiving the discharge for that specific obligation. Debtors often enter into these agreements to retain secured property, such as a car or a home, by continuing to make payments on the associated loan.

The law imposes strict requirements for a reaffirmation agreement to be legally valid and enforceable. It must be made before the bankruptcy discharge is granted and filed with the bankruptcy court. The agreement generally requires a detailed disclosure of the debtor’s income and expenses to ensure they can afford the payments without undue hardship.

If a debtor is represented by an attorney, the attorney must certify that the agreement is a fully informed and voluntary decision and does not impose an undue hardship. For unrepresented debtors, court approval is often required, where the judge assesses whether the agreement is in the debtor’s best interest. Debtors also have a right to rescind (cancel) the agreement within 60 days of filing it with the court or before the discharge order is entered, whichever is later.

Due to the binding nature of these agreements and their impact on a debtor’s financial fresh start, seeking legal counsel is highly advisable before entering into one. Reaffirming a debt means that if the debtor defaults on the reaffirmed obligation after bankruptcy, the creditor can pursue collection actions, including repossession of collateral and seeking a deficiency judgment.

Debts Not Affected by Discharge

While Section 524 provides significant protection through the discharge injunction, it is important to understand that it only applies to debts that are dischargeable under the Bankruptcy Code. Not all debts can be eliminated through bankruptcy proceedings. Certain categories of debts are considered non-dischargeable due to various public policy reasons.

Common examples of debts that generally cannot be discharged include:
Most student loans
Certain types of taxes (especially recent income taxes and payroll taxes)
Domestic support obligations like child support and alimony
Debts arising from fraud, willful and malicious injury, or those incurred due to driving under the influence
Court-ordered fines, penalties, and restitution in criminal cases

For these non-dischargeable debts, the discharge injunction under Section 524 does not apply. Creditors of such debts retain their right to pursue collection actions against the debtor, even after a bankruptcy discharge has been granted for other obligations. This distinction is important for debtors to understand the full scope of their financial obligations post-bankruptcy.