Objections to Discharge or Dischargeability
The bankruptcy discharge is a central concern to most debtors and to many creditors. Without going into the details, the discharge serves to wipe out personal liability on a substantial portion of debts. For most chapter 7 debtors, obtaining a discharge is a primary reason they filed, as it is the instrument of their fresh start. The chapter 13 discharge is similarly important, as is the reward obtained for completing a chapter 13 plan.
Because of the significance and broad authority of a discharge, Congress created several provisions in the bankruptcy law where a creditor or other party might raise objection to the discharge. This post focuses on the important distinction between an objection to dischargeability and an objection to discharge. The former, an objection to dischargeability, is a narrower objection seeking to exclude a particular debt from the discharge. The latter, an objection to discharge, is a broad objection seeking to entirely withhold the discharge from the debtor.
Section 523(a) of the bankruptcy code establishes several debts that are excluded from the discharge. Under 523(c), a creditor has the duty to affirmatively object to dischargability of three particular kinds of debt, hence creating a limited category of debts that are discharged unless a creditor prevails on an objection to dischargability. In brief these include: under 523(a)(2), obtaining credit or property by fraud or falsity; under 523(a)(4), fiduciary fraud, embezzlement, or larceny; and under 523(a)(6), willful and malicious injury. Notably, 523(a)(2) also provides a presumption that certain purchases of luxury goods within 90 days prior to filing or use of cash advances within 70 days prior to filing is presumed non-dischargable.
Section 727 of the bankruptcy code provides for objections to the discharge itself. Creditors, as well as the trustee and the Bankruptcy Administrator can make an objection to discharge. Grounds for objections under 727(a)(2-6) can be summarized as follows: misusing property of the estate, concealing or destroying property prior to bankruptcy, concealing or tampering with financial information or recording, lying in connection with the bankruptcy case, failing to explain loss of assets, and refusing to obey court orders. Many of these provisions target the debtor who is not being honest and forthcoming and attempting to get more than their entitlement under the bankruptcy code. Occasionally, property transfers by debtors within a year of the bankruptcy will generate objections under this section when there is a legitimate dispute as to whether the debtor intended to harm a creditor by means of the transfer.
For a debtor, an objection to discharge is a more serious matter than an objection to dischargability. If the court grants an objection to discharge, the debtor remains liable on every debt, as if the bankruptcy had not been filed. When an objection to dischargability is granted, only the particular debt at issue carries through after the bankruptcy as a personal liability of the debtor. For the same reason, a creditor would generally prefer an objection to dischargability over an objection to discharge. If a creditor is successful in excluding only its debt from the discharge, it faces less competition for collection post-discharge. However, only certain conduct gives rise to both discharge and dischargability objection claims, so creditors may not always have the ability to choose. In some cases, a creditor will raise both objections in the same pleading, particularly if they are confident they would stand well against other creditors in seeking collection post-bankruptcy, or believe the discharge claim is stronger.
Either an objection to discharge or and objection to dischargability is commenced as an adversary proceeding, a bankruptcy federal lawsuit. Such is serious litigation matter that a creditor must carefully consider the costs and benefits before proceeding. A debtor must also determine if it is cost effective to respond. Please contact our office if you would us to evaluate a discharge or dischargability complaint.