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Bankruptcy
There are numerous reasons which may trigger the need for someone to consider
filing for bankruptcy protection. Overwhelming medical bills, divorce,
financial mismanagement, illness, bad investments, disability, oppressive
business conditions or the downturn in our economy, are all possible conditions
which may cause one inability to pay debts. Unless the debts can be negotiated
downward, restructured or voluntarily forgiven by the creditor, the debtor faces
potentially serious consequences, including expensive and protracted litigation,
money judgments, repossession, wage garnishments, or the involuntary seizure of
his or her money and other property to satisfy judgment debts.
Fortunately, Federal Law permits the discharge, that is the outright
cancellation, of all eligible debts of qualified debtors, pursuant to Chapter 7
of the Bankruptcy Code. The following questions and answers provide a more in
depth look at the Chapter 7 process, with which our attorneys stand ready to
help.
What is discharge in bankruptcy?
A
bankruptcy discharge releases the debtor from personal liability for certain
specified types of debts. In other words, the debtor is no longer legally
required to pay any debts that are discharged. The discharge is a permanent
order prohibiting the creditors of the debtor from taking any form of collection
action on discharged debts, including legal action and communications with the
debtor, such as telephone calls, letters, and personal contacts.
Although a debtor is not personally liable for discharged debts, a valid lien (i.e.,
a charge upon specific property to secure payment of a debt) that has not been
avoided (i.e.,
made unenforceable) in the bankruptcy case will remain after the bankruptcy
case. Therefore, a secured creditor may enforce the lien to recover the property
secured by the lien.
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When does the discharge occur?
The timing of the discharge varies, depending on the chapter under which the
case is filed. In a chapter 7 (liquidation) case, for example, the court usually
grants the discharge promptly on expiration of the time fixed for filing a
complaint objecting to discharge and the time fixed for filing a motion to
dismiss the case for substantial abuse (60 days following the first date set for
the 341 meeting). Typically, this occurs about four months after the date the
debtor files the petition with the clerk of the bankruptcy court. In individual
chapter 11 cases, and in cases under chapter 12 (adjustment of debts of a family
farmer or fisherman) and 13 (adjustment of debts of an individual with regular
income), the court generally grants the discharge as soon as practicable after
the debtor completes all payments under the plan. Since a chapter 12 or chapter
13 plan may provide for payments to be made over three to five years, the
discharge typically occurs about four years after the date of filing. The court
may deny an individual debtor's discharge in a chapter 7 or 13 case if the
debtor fails to complete "an instructional course concerning financial
management." The Bankruptcy Code provides limited exceptions to the "financial
management" requirement if the U.S. trustee or bankruptcy administrator
determines there are inadequate educational programs available, or if the debtor
is disabled or incapacitated or on active military duty in a combat zone.
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How does the debtor get a discharge?
Unless there is litigation involving objections to the discharge, the debtor
will usually automatically receive a discharge. The Federal Rules of Bankruptcy
Procedure provide for the clerk of the bankruptcy court to mail a copy of the
order of discharge to all creditors, the U.S. trustee, the trustee in the case,
and the trustee's attorney, if any. The debtor and the debtor's attorney also
receive copies of the discharge order. The notice, which is simply a copy of the
final order of discharge, is not specific as to those debts determined by the
court to be non-dischargeable, i.e.,
not covered by the discharge. The notice informs creditors generally that the
debts owed to them have been discharged and that they should not attempt any
further collection. They are cautioned in the notice that continuing collection
efforts could subject them to punishment for contempt. Any inadvertent failure
on the part of the clerk to send the debtor or any creditor a copy of the
discharge order promptly within the time required by the rules does not affect
the validity of the order granting the discharge.
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Are all of the debtor's debts discharged or only some?
Not all debts are discharged. The debts discharged vary under each chapter of
the Bankruptcy Code. Section 523(a) of the Code specifically excepts various
categories of debts from the discharge granted to individual debtors. Therefore,
the debtor must still repay those debts after bankruptcy. Congress has
determined that these types of debts are not dischargeable for public policy
reasons (based either on the nature of the debt or the fact that the debts were
incurred due to improper behavior of the debtor, such as the debtor's drunken
driving).
There are 19 categories of debt excepted from discharge under chapters 7, 11,
and 12. A more limited list of exceptions applies to cases under chapter 13.
Generally speaking, the exceptions to discharge apply automatically if the
language prescribed by section 523(a) applies. The most common types of
nondischargeable debts are certain types of tax claims, debts not set forth by
the debtor on the lists and schedules the debtor must file with the court, debts
for spousal or child support or alimony, debts for willful and malicious
injuries to person or property, debts to governmental units for fines and
penalties, debts for most government funded or guaranteed educational loans or
benefit overpayments, debts for personal injury caused by the debtor's operation
of a motor vehicle while intoxicated, debts owed to certain tax-advantaged
retirement plans, and debts for certain condominium or cooperative housing fees.
The types of debts described in sections 523(a)(2), (4) and(6) (obligations
affected by fraud or maliciousness) are not automatically excepted from
discharge. Creditors must ask the court to determine that these debts are
excepted from discharge. In the absence of an affirmative request by the
creditor and the granting of the request by the court, the types of debts set
out in sections 523(a)(2), (4) and (6) will be discharged.
A
slightly broader discharge of debts is available to a debtor in a chapter 13
case than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in
chapter 7, include debts for willful and malicious injury to property, debts
incurred to pay non-dischargeable tax obligations, and debts arising from
property settlements in divorce or separation proceedings. Although a chapter 13
debtor generally receives a discharge only after completing all payments
required by the court-approved (i.e.,
"confirmed") repayment plan, there are some limited circumstances under which
the debtor may request the court to grant a "hardship discharge" even though the
debtor has failed to complete plan payments. Such a discharge is available only
to a debtor whose failure to complete plan payments is due to circumstances
beyond the debtor's control. The scope of a chapter 13 "hardship discharge" is
similar to that in a chapter 7 case with regard to the types of debts that are
excepted from the discharge. A hardship discharge also is available in chapter
12 if the failure to complete plan payments is due to "circumstances for which
the debtor should not justly be held accountable."
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Does the debtor have the right to a discharge or can creditors
object to the discharge?
In chapter 7 cases, the debtor does not have an absolute right to a discharge.
An objection to the debtor's discharge may be filed by a creditor, by the
trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly
after the case is filed that sets forth much important information, including
the deadline for objecting to the discharge. To object to the debtor's
discharge, a creditor must file a complaint in the bankruptcy court before the
deadline set out in the notice. Filing a complaint starts a lawsuit referred to
in bankruptcy as an "adversary proceeding."
The court may deny a chapter 7 discharge for any of the reasons described in
section 727(a) of the Bankruptcy Code, including failure to provide requested
tax documents; failure to complete a course on personal financial management;
transfer or concealment of property with intent to hinder, delay, or defraud
creditors; destruction or concealment of books or records; perjury and other
fraudulent acts; failure to account for the loss of assets; violation of a court
order or an earlier discharge in an earlier case commenced within certain time
frames (discussed below) before the date the petition was filed. If the issue of
the debtor's right to a discharge goes to trial, the objecting party has the
burden of proving all the facts essential to the objection.
In chapter 12 and chapter 13 cases, the debtor is usually entitled to a
discharge upon completion of all payments under the plan. As in chapter 7,
however, discharge may not occur in chapter 13 if the debtor fails to complete a
required course on personal financial management. A debtor is also ineligible
for a discharge in chapter 13 if he or she received a prior discharge in another
case commenced within time frames discussed the next paragraph. Unlike chapter
7, creditors do not have standing to object to the discharge of a chapter 12 or
chapter 13 debtor. Creditors can object to confirmation of the repayment plan,
but cannot object to the discharge if the debtor has completed making plan
payments
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Can a debtor receive a second discharge in a
later chapter 7 case?
The court will deny a discharge in a later chapter 7 case if the debtor received
a discharge under chapter 7 or chapter 11 in a case filed within eight years
before the second petition is filed. The court will also deny a chapter 7
discharge if the debtor previously received a discharge in a chapter 12 or
chapter 13 case filed within six years before the date of the filing of the
second case unless (1) the debtor paid all "allowed unsecured" claims in the
earlier case in full, or (2) the debtor made payments under the plan in the
earlier case totaling at least 70 percent of the allowed unsecured claims and
the debtor's plan was proposed in good faith and the payments represented the
debtor's best effort. A debtor is ineligible for discharge under chapter 13 if
he or she received a prior discharge in a chapter 7, 11, or 12 case filed four
years before the current case or in a chapter 13 case filed two years before the
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Can the discharge be revoked?
The court may revoke a discharge under certain circumstances. For example, a
trustee, creditor, or the U.S. trustee may request that the court revoke the
debtor's discharge in a chapter 7 case based on allegations that the debtor:
obtained the discharge fraudulently; failed to disclose the fact that he or she
acquired or became entitled to acquire property that would constitute property
of the bankruptcy estate; committed one of several acts of impropriety described
in section 727(a)(6) of the Bankruptcy Code; or failed to explain any
misstatements discovered in an audit of the case or fails to provide documents
or information requested in an audit of the case. Typically, a request to revoke
the debtor's discharge must be filed within one year of the discharge or, in
some cases, before the date that the case is closed. The court will decide
whether such allegations are true and, if so, whether to revoke the discharge.
In a chapter 11, 12 and 13 cases, if confirmation of a plan or the discharge is
obtained through fraud, the court can revoke the order of confirmation or
discharge.
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May the debtor pay a discharged
debt after the bankruptcy case has been concluded?
A
debtor who has received a discharge may voluntarily repay any discharged debt. A
debtor may repay a discharged debt even though it can no longer be legally
enforced. Sometimes a debtor agrees to repay a debt because it is owed to a
family member or because it represents an obligation to an individual for whom
the debtor's reputation is important, such as a family doctor.
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What can the debtor do if a
creditor attempts to collect a discharged debt after the case is concluded?
If a creditor attempts collection efforts on a discharged debt, the debtor can
file a motion with the court, reporting the action and asking that the case be
reopened to address the matter. The bankruptcy court will often do so to ensure
that the discharge is not violated. The discharge constitutes a permanent
statutory injunction prohibiting creditors from taking any action, including the
filing of a lawsuit, designed to collect a discharged debt. A creditor can be
sanctioned by the court for violating the discharge injunction. The normal
sanction for violating the discharge injunction is civil contempt, which is
often punishable by a fine.
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May an employer terminate a
debtor's employment solely because the person was a debtor or failed to pay a
discharged debt?
The law provides express prohibitions against discriminatory treatment of
debtors by both governmental units and private employers. A governmental unit or
private employer may not discriminate against a person solely because the person
was a debtor, was insolvent before or during the case, or has not paid a debt
that was discharged in the case. The law prohibits the following forms of
governmental discrimination: terminating an employee; discriminating with
respect to hiring; or denying, revoking, suspending, or declining to renew a
license, franchise, or similar privilege. A private employer may not
discriminate with respect to employment if the discrimination is based solely
upon the bankruptcy filing.
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