Bankruptcy Discharge Denial: Total or Partial

In bankruptcy, creditors may object to the discharge of the individual debts owed to them if one of the listed exceptions to discharge applies (for example, if the debt was incurred through fraud).  See More On Objecting to Discharge of Individual Debts Under 11 U.S.C. 523

But in a Chapter 7 or Chapter 11 case creditors or the bankruptcy Trustee may seek to have a debtor’s entire discharge denied if adequate legal grounds exist.

It is an oft-quoted maxim that the fresh start in bankruptcy is limited to the “honest, but unfortunate, debtor.”

There are certain actions (or inactions) which can result in you no longer being considered honest and cause your discharge to be denied in a Chapter 7 case.

Denial Of Entire Discharge Under Section 727 Of Bankruptcy Code

Bankruptcy code Section 727 (11 U.S.C. 727) allows a creditor or party-in-interest to object to the discharge of all debts if certain criteria can be proved.  Chief among these are the following:

  1. The debtor, with intent to hinder, delay or defraud, transferred, destroyed, or concealed property within one year prior to filing the bankruptcy, or after the filing of the bankruptcy;
  2. The debtor concealed, destroyed, falsified or failed to keep and preserve books and records showing debtor’s financial position. See examples of failure to keep adequate records.
  3. The debtor knowingly made a false oath or account, presented a false claim, etc.
  4. Failure to comply with a bankruptcy court order
  5. Failure to take the required post-filing financial management course.

There are many more of these, but these are the main ones. It is more difficult to prevail on an objection to the debtor’s entire discharge than it is to object based on just a specific debt under section 523.

An objection to discharge requires going through a full trial, so it can be very expensive to defend.

Denial of Discharge Does Not Stop Trustee From Liquidating Assets

To make matters potentially worse, having one’s discharge denied does not affect the administration of the bankruptcy case. The Trustee in a Chapter 7 case can and will continue to liquidate (sell) any non-exempt assets of the debtor and pay the creditors.

Thus, it is extremely important to be accurate and honest on the information given on the bankruptcy petition and schedules, as well as to be filing the bankruptcy case in good faith.

Frequently Asked Questions About Denial of Discharge in Bankruptcy

Q. What is an Attempt To Defraud Under Bankruptcy Code 727?

A.  This broadly encompasses any attempts to get rid of assets prior to filing a bankruptcy case. It can include the obvious things, like transferring title to your home to a relative, giving a relative a large security interest in your home, simply giving money away to someone to hold for you. How recent the transfers were is important, but if there is intent to defraud, the court and trustee can lookback at least 4 years in California, and up to 10 years if you have tax debts.

Q. What is Concealment of Property in Bankruptcy?

A.  This includes things such as if you conceal, destroy, falsify, mutilate, or fail to keep information regarding your financial condition. This includes destroying records that could lead the trustee to property you haven’t disclosed or simply not being able to back up assertions about your finances contained in your bankruptcy schedules. This is becoming more prevalent with regard to crypto currency “accounts” and tracing where money has gone. It is very important to keep detailed records and statements of any financial transactions you make.

Keep in mind “failing to keep information” does not require destruction; it is merely negligence in keeping the documentation that can lead to denial of a discharge. Your attorney can advise if this will be an issue in your case.

Q.  Lying on Your Bankruptcy Papers or To Trustee

A. The documents you file with your bankruptcy petition (schedules, statement of financial affairs, etc.) are signed under penalty of perjury. Additionally, you will be examined under oath by the Trustee in your case. If you make false statements on the bankruptcy papers or orally to the Trustee, those are grounds for denial of your entire discharge.

Q. What is Failure To Comply With A Bankruptcy Court Order?

A. Any order that is entered in by the bankruptcy court, if lawful, must be followed. This includes an order to appear for a hearing, an order to comply with something, or any number of other things. The bottom line is that you need to follow the rules or else you can lose your discharge.

Q. Failure to Take Post-Filing Financial Management Course

A.  This is a new requirement (as of October 2005) and one that many still mess up. You must take this course and file the required certificate with the bankruptcy court in order to get your discharge. If this is not timely filed, your case will be closed without a discharge. However, if this happens, it is a relatively simple matter to reopen the case, take the course, and file the certificate in order to get the discharge entered.  See more about reopening case to file bankruptcy course certificate.