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What is a bankruptcy discharge and what is the difference between denial of discharge and denial of the dischargeability of an individual debt?

Unless for some reason a general discharge of debts is denied (see below ), the Court typically enters an order which grants a discharge to the person(s) named as the debtor(s). A discharge in bankruptcy eliminates a debtor's legal obligation to pay debts that are discharged. The granting of a discharge (1) is not a dismissal of the case, (2) does not determine how much money, if any, the trustee will pay to creditors, and (3) does not always automatically result in the closing of a case. All contested matters, some adversary proceedings, and appeals must be resolved, and the appointed trustee or debtor-in-possession must file a Final Report and Account and request entry of a Final Decree before the Clerk's Office will close the case.

Some individual debts are not dischargeable, and the dischargeability of others may be denied, depending on particular circumstances (see below).

The discharge is a permanent injunction which prohibits any attempt to collect from the debtor all debts that have been discharged, except for debts not discharged by the court. For example, a creditor is not permitted to contact a debtor by mail, phone, or otherwise, to file or continue a lawsuit, to attach wages or other property, or to take any other action to collect a discharged debt from the debtor. There are also special rules that protect certain community property owned by the debtor's spouse, even if that spouse did not file a bankruptcy case. A creditor who violates this order can be held in contempt of court and required to pay damages and attorney fees to the debtor. However, even if a debt is discharged, a creditor may have the right to enforce a valid lien, such as a mortgage or security interest, against the collateral after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case.

Most, but not all, types of debts are discharged if the debt existed on the date the bankruptcy case was filed. (If the case was begun under one chapter of the Bankruptcy Code and then converted to a different chapter, the discharge applies to the debts owed when the bankruptcy case was converted.)

In a Chapter 7 case, the discharge is typically entered within 75 days after the §341(a) meeting of creditors. In a Chapter 11 case, the discharge is deemed entered once the debtor' s Chapter 11 Plan has been confirmed (except in an individual Chapter 11 in which discharge is deferred until the debtor completes all plan payments). In Chapter 12 or 13 cases, the discharge is typically entered upon the request of the Trustee following the completion of the debtor's plan payments. Even if a debtor has the legal right to discharge a debt, the debtor can voluntarily repay the debt, formally reaffirm the debt, or redeem collateral which secures a debt.

Denial of Debtor's Discharge And Denial of the Dischargeability of a Particular Debt

A discharge can be denied by the court for either all debts (denial of debtor's discharge) or for one particular debt (denial of the dischargeability of a particular debt). For a discharge to be denied as to all debts, either the debtor must simply not be entitled to a discharge at all by law, or someone must file an Adversary Complaint (Bankruptcy Court's version of a civil lawsuit) with the court. To deny the dischargeability of a particular debt, either the debt must be non-dischargeable by law, or someone must file an Adversary Complaint with the court seeking to deny the dischargeability of that debt. The following discusses both the denial of debtor's discharge and the denial of the dischargeability of a particular debt.

Denial Of Debtor's Discharge

In the following circumstances, the debtor is not entitled by law to a discharge of any debts, and no party need file an Adversary Complaint seeking to deny the debtor a discharge:

1. The debtor is not an individual (in Chapter 7 cases only);

2. The debtor received a discharge in a Chapter 7 or 11 case filed within eight years prior to the filing of a new Chapter 7 case (six years if the new case was filed prior to 10/17/05), or received a discharge in a Chapter 12 or 13 case within six years prior to the filing of a new Chapter 7 case. See also FAQ When May I File Bankruptcy Again? If the debtor is not entitled to a discharge because of a discharge entered in a prior case, the Court will typically issue a Notice of Intent Not to Grant a Discharge;

3. The debtor has filed, and the Court has approved, a waiver of discharge;

4. The Chapter 11 Plan, or the order confirming the Chapter 11 plan, provides that the debtor is not entitled to a discharge; and/or

5. The Chapter 11 Plan is a liquidating plan, and the debtor would be denied a discharge under 11 U.S.C. § 727 had the case been filed under Chapter 7 (for non-individual Chapter 11 debtors only).

Under certain circumstances, the debtor's right to a general discharge can be denied by the Judge. This usually results from some major misconduct on the part of the debtor. In order for a discharge to be denied for any of these reasons, a party in interest (e.g., Trustee or creditor) must file an Adversary Complaint objecting to discharge within sixty days following the first date set for the §341(a) meeting of creditors. The most common examples are as follows:

1. The debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate, has transferred, removed, destroyed, mutilated, or concealed: (a) property of the debtor within one year prior to the filing of the bankruptcy petition and/or (b) property of the estate after the date of filing of the bankruptcy petition;

2. The debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve books and records about the debtor's financial condition and/or business transactions;

3. The debtor has failed to satisfactorily explain a loss of assets;

4. The debtor knowing and fraudulently (a) made a false oath or account, (b) presented or used a false claim, (c) gave money or property to a third party for debtor's advantage, or (d) failed to turn over books and records; and/or

5. The debtor has refused to (a) obey any lawful order of the Court other than an order to respond to a material question or to testify, (b) respond to a material question approved by the Court, or to testify, notwithstanding a claim of self-incrimination, after immunity has been granted, or (c) respond to a material question approved by the Court, or to testify, on a ground other than self-incrimination.

Denial of the Dischargeability of a Particular Debt

As noted above, most debts are dischargeable in bankruptcy. The Bankruptcy Code, however, states that certain individual debts are not dischargeable, and that the creditor does not need to take any Court action to have such a debt declared non-dischargeable. The most common examples of such debts are:

1. Debts for most taxes;

2. Debts for domestic support obligations or those arising out of a divorce decree or separation agreement (except that non-support marital debt can be discharged in Chapter 13);

3. Debts for most student loans;

4. Debts for most fines, penalties, forfeitures, or criminal restitution;

5. Debts for personal injury or death caused by the debtor's operation of a motor vehicle, vessel, or aircraft while intoxicated;

6. Some debts which were not properly listed on the bankruptcy petition and schedules;

7. Debts for which a Reaffirmation Agreement has been approved;

8. Debts which could have been listed in a prior bankruptcy case;

9. Debts neither listed nor scheduled in time to allow the creditor to file a Proof of Claim;

10. Post-bankruptcy condominium or cooperative owners' association fees; and

11. Debts incurred to pay non-dischargeable state and/or federal tax debt.

The dischargeability of other types of individual debts may be denied if the creditor files, within sixty days after the first date set for the §341(a) meeting of creditors, an Adversary Complaint to deny the dischargeability of the debt. If such a complaint is timely filed, the Judge will ultimately rule as to whether or not the debt will be discharged. If a complaint is not timely filed, the debt will be considered discharged. Such "potentially non-dischargeable" debts include:

1. Debts incurred by fraud, false pretenses, or materially false statements regarding financial condition;

2. Debts incurred as a result of fraud or defalcation while acting in a fiduciary capacity, or for embezzlement or larceny; and

3. Debts incurred for willful and malicious injury by the debtor to another entity or property of another entity (except that such debts can be discharged in Chapter 13).

NOTE: The debtor may receive a discharge even if any complaint to deny the dischargeability of a single debt is still pending. The debt in question will not actually be discharged until the Judge rules on the objection.

CAUTION: These lists include many examples of non-dischargeable debts, but 11 U.S.C. § 523 and 11 U.S.C. § 1328 should be reviewed for complete lists.

Hardship Discharge

If an individual debtor in a Chapter 11, 12, or 13 case is not able to maintain plan payments to the applicable case trustee, it is possible to file a motion for a "hardship" discharge so that the case can be completed. As a practical matter, the relief obtained by the debtor is quite similar to that obtained by converting the case to one under Chapter 7 in that the debts which are not dischargeable in Chapter 7 are not discharged if the Court approves a hardship discharge in the Chapter 11, 12, or 13 case.

For an individual Chapter 11, 12, or 13 debtor to obtain a hardship discharge, such debtor must show that (1) the amount paid to creditors pursuant to the confirmed Chapter 11, 12, or 13 Plan is at least as much as the creditors would have received had the estate been liquidated as of the effective date of the Plan, and (2) modification of the Plan under §1127, §1229, or §1329 is not practicable. In addition, in a Chapter 12 or 13 case, the debtor must show that the failure to complete plan payments is due to circumstances for which the debtor should not justly be held accountable.

Motions seeking a hardship discharge must be filed using LBF 1378.

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