A creditor or a bankruptcy trustee could potentially object to the discharge—legal write-off—of ALL your debts. Very rare, and preventable.
Challenging the Discharge of One Debt vs. All Debts
Ten days ago (on March 3, 2017) our blog post was about a creditor challenging the discharge of its debt. Certain special kinds of debts are never discharged—for example, child and spousal support. Other specific kinds are not discharged unless meeting certain conditions—for example, income taxes. But a creditor can challenge the discharge of virtually ANY debt if that debt was created through a debtor’s fraud or misrepresentation, or through “willful and malicious injury” to person or property. Those kinds of debt-discharge challenges are relatively rare. Most people incur debts honorably, and just can’t pay them back later.
If challenges to the discharge of a single debt are unusual, much rarer are challenges to the discharge of ALL debts. Under certain very limited circumstances a creditor or bankruptcy trustee can object to the discharge of all your debts. Usually such an objection is based on fraud or some other illegal activity by the debtor in connection with the bankruptcy case itself.
As the U.S. Supreme Court has said, the bankruptcy laws give “the opportunity for a completely unencumbered new beginning to the ‘honest but unfortunate debtor.’” Grogan v Garner, 498 US 279 (1991). The bankruptcy system does not treat kindly those who purposely or recklessly try to cheat the system. You need to know what bankruptcy fraud is so that you can definitely avoid it.
Examples of bankruptcy fraud include:
- Committing perjury by intentionally providing false or incomplete information on your bankruptcy paperwork (Section 727(a)(4)(D) of the U.S. Bankruptcy Code)
- transferring title or property to another person for the purpose of not including it in the bankruptcy (Section 727(a)(2))
- lying to the bankruptcy trustee or judge during hearings (Section 727(a)(4)(A))
Creditors, the Chapter 7 or Chapter 13 trustee, and the U.S. Trustee may all object to a discharge of debts on these grounds.
The penalty for a debtor to be hit with and then lose this objection can be very severe. If the creditor or trustee wins, then the bankruptcy case is dismissed and no debts are discharged. These debts could not be included in any future bankruptcy cases.
Bankruptcy fraud can also be a federal crime. A defrauding debtor could not only lose the ability to discharge debts but could be charged and convicted of a crime. In extraordinary situations, the debtor could be sentenced to prison.
Clearly, nobody wants to risk an objection to discharge. In general, it should not be hard to simply be honest and straightforward with the bankruptcy process. The most practical way to do that is to be honest and very straightforward with your bankruptcy lawyer. Answer all questions thoroughly. When in doubt, tell the lawyer what’s on your mind. There are usually sensible solutions. Share any and all your concerns with him or her—most of the time you have nothing to worry about and you’ll feel much better knowing that. And if you have reason to be concerned, it’s infinitely better for the lawyer to be able to address it head on.
Bankruptcy fraud, and resulting objections to discharge, are absolutely preventable. Bankruptcy law can and does provide extraordinary benefits. Be sure to not lose your ability to get those benefits by taking unfair advantage of that beneficial system.