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When Can My Discharge Be Denied in Chapter 7 or Chapter 13 Bankruptcy?

DENIAL OF DISCHARGE IN MICHIGAN BANKRUPTCY: WATCH YOUR STEP

 

It is the goal of a Chapter 7 or Chapter 13 bankruptcy to obtain a discharge of one’s debts. The “discharge” is a sort of “master injunction” under Federal law, by way of the US Bankruptcy Code, that removes a debtor’s obligation to repay any of the dischargeable debts (some are not!) that the debtor had prior to the day he or she filed for bankruptcy.

 

The discharge injunction requires that any creditor holding one of these dischargeable debts cease and desist any attempt to collect upon them from the debtor, personally.

It is the goal of a Chapter 7 or Chapter 13 bankruptcy to obtain a discharge which is a Federal Court Order that forever bars a creditor from attempting to collect a debt.

 

Given that it is a Federal legal mechanic, the discharge injunction preempts, or overrules, any Michigan or other state court-based money judgment (again, with exceptions, such as a divorce judgment in large part).

 

A bankruptcy discharge, in either Chapter 7 or Chapter 13, is something to which a debtor is simply entitled under the Bankruptcy Code. A discharge simply will be granted to the debtor filing under Chapter 7 or Chapter 13—except when the circumstances determine that this would be unjust.

 

When can this occur?

 

A bankruptcy discharge is an end result of a sometimes lengthy process in which the debtor filing the bankruptcy is required to disclose an enormous amount of personal information. A longstanding canard of the bankruptcy process in the US is a discharge of debt in bankruptcy is reserved for the “honest but unfortunate debtor.”

 

The honest bit is the key component of that notion, which is often intoned by bankruptcy judges in their decisions.

 

The Bankruptcy Code discusses what “honesty” in the bankruptcy process means.

 

THE BANKRUPTCY CODE AND THE HONEST DEBTOR

 

A bankruptcy discharge shall be granted, says the Bankruptcy Code, unless the debtor engages in one of several specified acts of “dishonesty” (or what judges love to call “bad faith”).

 

If a debtor removes, destroys, mutilates, transfers, or conceals his or her own property within one year of the filing of the bankruptcy case or property of the Bankruptcy Estate after the case filing, that is ground for denial of discharge if this act is conducted with the intent of hindering, delaying, or defrauding a creditor or other officer of the Bankruptcy Estate (such as a Chapter 7 Trustee).

 

In other words, fraudulent transfer will lose a debtor his or her discharge.

 

If the debtor conceals, destroys, mutilates, falsifies, or fails to keep or preserve any recorded information, including books, records, and papers from which his or her financial condition can be determined, that is grounds for a denial of discharge.

 

A debtor in Chapter 7 or Chapter 13 bankruptcy must keep his or her records in usable condition and turn them over as required in the bankruptcy process.

 

It is the basis for a discharge denial if, in connection with a bankruptcy case, a debtor “knowingly and fraudulently” makes a “false oath or account;” presents a “false claim;” attempts to bribe a party with money or property or accepts money or property for engaging or refraining to engage in an act; or refused to turn over any information relating to the debtor’s property or financial affairs.

 

A debtor cannot lie or bribe or be bribed, in other words. A “false oath” or “false claim” can occur in testimony in the bankruptcy process, either in court before a judge or at a 341 Meeting of Creditors or 2004 Examination or other oral hearing, or it can, importantly, occur on paper.

 

The Bankruptcy Petition that a debtor files with the US Bankruptcy Court in order to initiate a Chapter 7 or Chapter 13 proceeding is essentially, a list of everything the debtor owns, what it’s worth, everyone the debtor owes money to (whether dischargeable or not), the debtor’s income and expenses, and the answer to a long set of questions about the debtor’s behavior and transactions of every sort over the ten years prior to the date of filing the bankruptcy case.

 

An untruth in any of the Bankruptcy Petition Schedules or Statements disclosing these things, or an intentional failure to answer a question or provide information in the Schedules or Statements, is a basis for denial of the debtor’s discharge.

 

An unintentional mistake or a failure to disclose information by inadvertence is not a basis for discharge denial.

 

However, the Chapter 7 and Chapter 13 Trustees, the US Trustee, and creditors, if contesting a debtor’s discharge, will attempt to prove their case with circumstantial evidence. While theirs is the burden of proof, the more “circumstance” a debtor gives them to work, the easier their job will be.

 

Too much “inadvertence” quickly looks fishy, in other words.

 

When a debtor fails to satisfactorily explain any loss of assets, the bankruptcy discharge may be denied.

 

When a debtor refuses to obey a lawful order of the Bankruptcy Court, except in cases in which the debtor is entitled to avoid self-incrimination, discharge will also be denied.

 

BANKRUPTCY DISCHARGE DENIAL: DISMISSAL OF CHAPTER 7 AND CHAPTER 13 CASES

 

In addition to occasions in which the debtor proves to be something other than “honest but unfortunate,” a bankruptcy discharge can also be “lost” if the case itself is simply dismissed, of course.

 

If a debtor fails to pay the Bankruptcy Court its filing fee upon initiation of a Chapter 7 or Chapter 13 case, the case will be dismissed.

 

Unreasonable delay in the proceeding that prejudices creditors is cause for dismissal of a bankruptcy case.

 

There are multiple deadlines that must be met in a bankruptcy case. If it appears to a creditor and to the court that a debtor is just trying to buy time for something happening outside of the bankruptcy process or to “hide” from the creditor’s legal collection, repossession, eviction, or foreclosure processes outside of bankruptcy, this will not go well for the debtor. (An example would be filing a Chapter 13 case the day before a foreclosure sheriff’s sale without any intention of finishing the Chapter 13 but simply to buy time to find a buyer for the foreclosed property.)

 

There are any number of ways to have a Chapter 13 bankruptcy case dismissed. Chief among them are the debtor’s failure to either make monthly Chapter 13 Plan payments as required or to turn over annual tax returns as required throughout the 3-5-year-long case.

 

A Chapter 7 bankruptcy case may also be dismissed on the motion of a creditor, Chapter 7 Trustee, or the US Trustee if, in addition to all of the above bases for discharge denial, the debtor simply ought to be in a Chapter 13 bankruptcy instead.

 

That is, if the debtor earns too much money to be eligible for a Chapter 7 bankruptcy but has done so anyway, a motion to dismiss the case unless the debtor agrees to convert to Chapter 13 bankruptcy is very likely to follow the filing of the bankruptcy case.

 

It is beyond the scope of this article to delve too much deeper into what does or does not constitute “too much income” for this purpose. Suffice it to say that the much and properly maligned Chapter 7 Means Test is not the only barometer of income and Chapter 7 eligibility in the bankruptcy process.

 

DENIAL OF DISCHARGE IN MICHIGAN BANKRUPTCY: THE BOTTOM LINE

 

The bottom line with regard to denial of a bankruptcy discharge is that there are, as one can see, many ways to accomplish it.

 

The primary way to avoid having your discharge denied is to hire an experienced Michigan bankruptcy attorney to represent you in your Chapter 7 or Chapter 13 bankruptcy case.

 

Attorney Walter Metzen has represented thousands of consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan. A Board Certified Bankruptcy Expert, Attorney Metzen has successfully obtained thousands of discharges for his clients.

 

The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.