The Bankruptcy Discharge
The Bankruptcy Discharge
The bankruptcy discharge is the end goal of the bankruptcy case. Clients filing for bankruptcy are not only interested in stopping potential legal action such as repossession or foreclosure, but they are also interested in relieving themselves of the heavy burden of debt. When you receive a discharge at the end of your bankruptcy you are no longer legally responsible for repaying debts included in the discharge. The discharge is a court order that prohibits creditors from taking any action to collect debts that you owe them. It is permanent and can only be taken away by the court under certain circumstances such as fraud, which we will discuss later.
Before we discuss the reasons why the court can revoke a discharge, let’s discuss what happens when someone objects to your discharge. In a chapter 7 bankruptcy, a creditor, the trustee, or the United States trustee has the right to object to your discharge. If you remember, a chapter 7 bankruptcy is a liquidation bankruptcy. In those cases, any property that is not exempt is collected by the trustee and sold. The proceeds from the sale of your property, after administrative and other costs, are then distributed to your creditors.
In a chapter 7 bankruptcy a party who wishes to object to the discharge must file a complaint within 60 days after the first date set for the meeting of creditors. The bankruptcy court can extend the deadline to file an objection if there is cause. To extend the deadline a party files a motion with the court. If the court denies the discharge in a chapter 7 case, all of your nonexempt property will sold to pay creditors. And, more importantlt, if you still owe money to creditors, those creditors still have the legal right to collect on that debt. The denial of a discharge can be a huge blow for individuals and families filing bankruptcy.
When an Objection is Filed
When a complaint is filed to object to the discharge, the complaint will include information about why the discharge should not be granted by the court. The major reason for objecting to the discharge is lying on your bankruptcy petition. In denying the discharge the party objecting will have to show the court proof. The discharge will not be denied based on the belief that you lied or committed fraud, but must be at a minimum, circumstantial evidence of fraud.
Another objection to a discharge is intentionally transferring or hiding property or assets. The key issue in this objection is “intent.” When you transferred or hid the property the purpose of your actions must have been to delay, hinder, or defraud. Without this intent, the objection will be denied. Some examples of this in previous court cases are where the debtor purchased a car in her mother’s name at the request of the auto dealer’s finance manager or a case involving a debtor with drug problems. In both those cases, the court found that neither person had intended to hide property or defraud, so the objection to the discharge was denied by the court.
As we have discussed in a previous article on exemption planning, we will work with you when preparing your filing to determine how to maximize your exemptions and avoid any claims of fraud. Some individuals will attempt to transfer title to a car to a family member without receiving any payment for the car. This would be an example of possible fraud.
Another common objection is failure to keep records. The bankruptcy code states that denial of discharge is warranted if “the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.” Most of us will only keep credit card statements, bank statements, receipts, etc…. If you have these records, you should be fine. If for some reason the lack of records means there is no way to determine the state of your financial affairs, this may lead to denial of your discharge.
When an objection is filed, you will be sent a copy of the complaint to the address you used in your bankruptcy filing. If you receive a complaint, it is important to bring this to our attention immediately as your attorneys. If you are not represented, it is important to find an experienced bankruptcy attorney, such as those in our office, so that you do not face a possible denial of discharge.
We will prepare a response (referred to as an “answer”) to the objection and a motion to dismiss that we file in court. If you do not answer the complaint, the party objecting automatically wins and your discharge will be denied. When we go to trial, the party bringing the objection must show proof to back up their objection to your discharge. At the end of the trial, the judge makes a decision based on the evidence presented by both sides.
If the judge rules against you, you will be denied the bankruptcy discharge. There is an appeals process that we can use in such a case. If the judge rules for you, your bankruptcy process continues to go forward.
Revoking a Discharge
As mentioned earlier in this article, a discharge can be revoked after it has been granted. This is very rare. However the bankruptcy code states that on request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge if the discharge was obtained through fraud and the party requesting the revocation did not know of the fraud before discharge was granted.
Other grounds would be if the debtor acquired property that is property of the bankruptcy estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee. Additional, if after an audit, the debtor cannot explain any misstatements or does not make available all necessary documents or records that are requested in an audit, the discharge can be revoked. In general, the request to the court to revoke a discharge must be made within 1 year after the discharge.
Exceptions to Discharge
When filing bankruptcy, there are debts that cannot be discharged. These debts are often referred to as exceptions. There are two categories of debt that are exceptions. The first category includes those debts that are automatic exceptions. The second category includes exceptions that must be raised by a party to the bankruptcy during the process. These exceptions are then decided during the case. Creditors must raise these types of exceptions. The deadline to raise these exceptions is 60 days after the first date set for the meeting of creditors. The deadline can be extended if a motion is filed by a creditor prior to the deadline. If there is an exception filed by a creditor then the debtor must respond within 30 days or the court will rule in favor of the creditor.
Many taxes are not necessarily dischargeable. For those taxes that are dischargeable, there are particular rules that apply before the tax debt can be discharged. To discharge income taxes the following must apply:
- You must have filed an income tax return.
- You did not file a fraudulent return, report or notice.
- You did not attempt to evade the tax willfully, for example, by using a false social security number on your tax return.
- Your tax debt must be at least 3 years old from the time the tax return was originally due and the time you file bankruptcy.
- The tax return you filed must have been filed at least 2 years before filing for bankruptcy.
- The income tax owed must have been assessed within 240 days before filing your bankruptcy.
Even though you may be able to discharge income taxes, if the IRS has attached a lien to your property you cannot discharge the tax lien. The lien is a secured debt that cannot be discharged.
Taxes that cannot be discharged include the following: taxes for which you were required to file a return but did not; taxes where you filed a late return within the last 2 years; property taxes that were assessed before the start of your bankruptcy, but are less than one year old; taxes that a third party (such as an employer) is required to collect or withhold. In addition, certain other taxes cannot be discharged such as excise taxes, tax penalties, tax refunds that are errors, although there are specific rules involved with these types of taxes.
Tax Debts Under Chapter 7 vs. Chapter 13
When considering what chapter to file under, we will look at your tax debt to see how your tax debt will be handled under the rules for chapter 7 versus the rules for chapter 13. We may decide to file your tax return so that it will be considered a priority debt under chapter 13. It is then separately handled and paid before other unsecured debt. We will take the time analyze the specific circumstances surrounding your income tax debts to ensure that we can precisely calculate dates and time periods. We can then determine whether the tax debt is an allowed secured claim, unsecured priority claim, an unsecured claim. We will determine whether or not the claims are dischargeable and what amounts would not be discharged under each chapter in order to determine which chapter to use.
Fraud and Debt – Making False Financial Statements
The are times when a creditor will claim that an individual obtained either money, property, services, an extension, renewal or refinancing by using a false financial statement. The statement must be writing and it must be “materially” false. For example, if you make a false statement on an application, but that statement did not factor into the decision, the false statement would not be considered material. The statement must have something to do with your finances.
Another requirement for a creditor when trying to prove fraud is that the creditor must have reasonably relied on the false statement. For example, let’s say that a creditor relies on the value of property in decided to loan money rather than on the ability of the debtor to make payments. If this is the case, the creditor would not likely win in bringing a claim of fraud. Another example would be if a creditor lends money solely based on the information given by the person applying for the loan and does not do a credit check. That creditor may not win a claim of fraud. All of these decisions based on a claim of fraud will depend on the specific circumstances involved in the case.
The final piece of the puzzle needed for a creditor to prove fraud is intent. The creditor must prove that the debtor intended to deceive by the false statement. It may be that the debtor made a mistake in the false statement. Perhaps the debtor was negligent in making the false statement but was not intending to deceive. A debtor who makes a good faith effort but has forgotten to include debts such as taxes owed, may be successful in defending against a charge of making a false statement.
If a debtor obtains a loan through false pretenses or fraud, the court may decide that the debt is not dischargeable. Just as with false statements, the creditor must prove both intent of the debtor and that they justifiably relied on the false pretenses or fraud in making the decision to offer property, money, services, renew or refinance, or extend a loan.
It is important to note that there is a difference between reasonable reliance and justifiable reliance. Reasonable reliance is the standard used to when making false financial statements. Reasonable is an objective standard where the court will look at standard industry practices, such as obtaining a credit report to verify information on a credit application. Justifiable reliance is determined by looking at the specific, individual circumstances of the particular case and the qualities or characteristics of the particular person. Justifiable reliance is more subjective than reasonable reliance.
Objections to a discharge are a critical juncture in a bankruptcy case. Because the consequences of the court denying a discharge are so negative, having an experienced bankruptcy attorney handle your case can make the difference between losing all your non-exempt property in chapter 7 case and still owing money to your creditors or being able to finalize your bankruptcy, receive a discharge and start fresh.