What Is Bankruptcy Discharge?
Individuals and businesses petition for bankruptcy when they are unable to pay their debts and creditors threaten or take legal action to recover payment. In most cases, the debtor hopes to have his, her, or its debts discharged through bankruptcy.
Debt discharge means that the debtor is no longer legally obligated to pay back the debts. Creditors who have their claims discharged cannot legally collect their claims.
Which Debts Are Discharged?
With some exceptions, most unsecured debt is discharged. The most common debts which are discharged are:
- Credit card bills
- Utility bills
- Medical bills
- Attorney's fees
- Personal and business loans
- Deficiency balances
- Civil court judgments
- Taxes past a certain number of years
- Past rent and other lease obligations
Generally, a debt is discharged during bankruptcy as long as the debt is not secured by property and the Bankruptcy Code does not explicitly make the debt non-dischargeable.
What Is the Difference between Secured and Unsecured Debt?
Secured debts are debts where the creditor claims a debtor's property if the debtor fails to pay back the creditor. The property that the creditor claims and that the debtor must surrender if the debtor doesn't pay the debt is known as collateral property. Secured debt includes debt secured by collateral, constructive trusts, and equitable liens.
Home mortgages are the most famous example of a secured debt. The homeowner, the debtor, promises to pay the bank, the creditor, the mortgage. If the homeowner fails to do so, the bank has the right to take back the house.
In contrast, unsecured debts are merely promises made by the debtor to pay back the creditor. The distinction is important because unsecured debt is subject to discharge while unsecured debt is not.
Which Unsecured Debts Cannot Be Discharged?
The Bankruptcy Code makes certain unsecured debt non-dischargeable. These debts include child support, certain taxes, and student loans (with some exceptions), among others.
In addition, the Bankruptcy Code denies debtors discharge if the debtor commits bankruptcy fraud. The debtor is also denied a discharge if the debtor filed for bankruptcy multiple times in eight years during a Chapter 7 bankruptcy or filed for bankruptcy multiple times in six years during a Chapter 12 or 13 bankruptcy.
When Is a Discharge Given?
Discharge is given at the end of the bankruptcy. In Chapter 7, discharge is given at the end of liquidation.
In Chapter 11, discharge is typically not given. The debtors who typically file for bankruptcy under Chapter 11 are corporations, who are not permitted to receive a discharge. However, Chapter 11 allows debtors to restructure their debts in a way that they might not have to repay their debts. The General Motors bankruptcy is the most famous example of this.
In Chapter 12 or Chapter 13, discharge is given upon completion at the end of the repayment plan. However, discharge can be granted even if the debtor fails to complete the plan. This only occurs if circumstances beyond the debtor's control cause the debtor to fail to complete the plan and modification of said plan is impracticable.
Objections to Bankruptcy Discharges
There are certain types of debt that may be discharged in a bankruptcy case. Once a debt is discharged, a creditor will no longer be allowed to call the debtor, garnish their wages, sue them in court, or do any other activity that would force them to pay a debt that has already been discharged or eliminated.
Under Chapter 7 bankruptcy, also known as consumer or liquidation bankruptcy, a debtor will be permitted to request a discharge of all of their debt that is legally allowed to be discharged. Thus, they will no longer be responsible for repaying those debts. Debt that is legally capable of being discharged by a bankruptcy court is called, “qualifying debt”.
Even when a specific debt is legally capable of being discharged, however, there are some cases where a creditor or bankruptcy trustee can object to the discharge of all or a particular debt. They can do this by either filing an adversary proceeding or a motion to make the debt or entire bankruptcy case nondischargeable. These procedures generally involve what are referred to as objections to bankruptcy discharges.
What Debts are Not Qualified to be Discharged in Bankruptcy?
There are some debts that are not eligible to be discharged in a bankruptcy case. According to the U.S. Bankruptcy Code, some types of debt that may not qualify to be discharged include:
- Debt incurred in furtherance of a crime (e.g., embezzling funds while serving in a fiduciary capacity);
- Debt associated with child support or alimony;
- Student loan debts;
- Debt that stems from neglecting to pay taxes (e.g., income tax debt); and/or
- Debt racked up from unpaid HOA fees.
In most instances, debt that falls under any of the categories in the above list are usually considered to be nondischargeable. This means that a creditor will not need to file an objection to any of them since they are already considered to be nondischargeable debt under the law.
Additionally, there are some debts that may traditionally be classified as dischargeable, but some condition is met that transforms them into nondischargeable debts. In such a case, a creditor may file an objection against those debts.
When May a Creditor File an Objection to Discharge?
Creditors, lenders, and/or appointed bankruptcy trustees are all parties who may file an objection to discharge a certain debt in a bankruptcy case. In most cases, however, it is usually a creditor who files such an objection. This may occur when a creditor wants to prevent a specific debt that is still owed to them by the debtor from being discharged.
The creditor may achieve this by alleging that the debtor made a false statement to obtain a loan or cash advance from them before filing for bankruptcy. If the bankruptcy trustee (i.e., the person tasked with overseeing the bankruptcy case and administering funds to a debtor's creditors) finds the creditor's claim to be true, then this could result in a denial of a debtor's request to discharge a certain debt.
In general, there are two primary types of objections that a creditor can make. A creditor may either file an objection to discharge one particular debt or they may file an objection to all of a debtor's discharge requests. Aside from alleging that a debtor made false statements, some other ways that a creditor may accomplish this is by claiming that the debtor:
- Attempted to defraud the creditor;
- Tried to abuse the U.S. bankruptcy system;
- Failed to obey an order issued by the bankruptcy court;
- Misrepresented, destroyed, or hid property and assets from the bankruptcy court; or
- Committed perjury (i.e., lied under oath) by providing false statements on a loan application, to file a bankruptcy petition, or during the 341 meeting of the creditors.
It is important to note that committing bankruptcy fraud or any other crime related to a bankruptcy proceeding is a very serious offense that can lead to serious legal consequences, including a dismissal of a debtor's entire bankruptcy case, criminal fines, and imprisonment.
What are Some Common Creditor Objections to Bankruptcy Discharge?
There may be several reasons as to why a creditor may object to a certain bankruptcy discharge. In general, some of the most common creditor objections to discharge debts in a bankruptcy case may include:
- If there are implications or evidence of misrepresentation, fraud, and/or abuse of the bankruptcy system. For example, if a debtor misrepresents the amount of funds in a bank account by temporarily transferring them to a relative to make it seem like they have less money than they owe, then this may constitute an instance of misrepresentation or fraud. In which case, the court will most likely deny a discharge and could potentially dismiss the entire case.
- In addition, if it appears that a debtor tried to take advantage of the U.S. bankruptcy system in order to delay creditors or to avoid having to pay off certain debts, then the court will also likely deny a bankruptcy discharge. In extreme cases, such conduct can lead to the debtor also having to pay criminal fines or serve a prison sentence.
- If a debtor purchases a large sum of luxury items with their credit card prior to filing a petition for Chapter 7 bankruptcy. For instance, if a debtor buys unnecessary luxury items, such as a watch, fine jewelry, expensive electronics, or book reservations with a five-star resort (i.e., items that are not considered to be essential needs), within 90 days before they file for bankruptcy, the debt will be presumed nondischargeable by a court.
- The debtor will need to prove that these purchases were reasonably necessary to support either themselves or a dependent. As of April 2021, a debtor who buys luxury goods and/or services that amount to more than $675 within the 90-day period, should anticipate creditor objections and that this debt will not be discharged unless they can prove otherwise.
- Additionally, any cash advances that a debtor receives that amounts to more than $950 after asking for an extended line of credit within 70 days before filing a petition for bankruptcy, will also be presumed to be nondischargeable debt.
- The debtor will need to prove that these purchases were reasonably necessary to support either themselves or a dependent. As of April 2021, a debtor who buys luxury goods and/or services that amount to more than $675 within the 90-day period, should anticipate creditor objections and that this debt will not be discharged unless they can prove otherwise.
- If a debtor uses a credit card to pay off debts that traditionally are not eligible for bankruptcy discharge in a Chapter 7 case. For example, if a debtor used their credit card to pay down their student loans or HOA fees, then filed for bankruptcy to obtain a discharge of those debts that are now considered credit card debts, which would normally be either partially or fully dischargeable.
