The Bankruptcy discharge is what it is all about.  It is why people file for Bankruptcy, even though they also benefit from the automatic stay, lien stripping and other advantages in Bankruptcy.  Even if some debts are excepted from the discharge, the Bankruptcy discharge typically frees up enough money to that the individual or couple can pay off the non-discharged debt.  However, are there circumstances in which a person filing for Bankruptcy can be denied a discharge of any and all debt? Yes, it can and does happen.  In the Northern District of Georgia, which has one of the highest number of Bankruptcy filings in the country, five to ten adversary proceedings a month will be filed to deny or revoke a discharge.  Here are the common reasons that a person may be denied a discharge (or have their discharge revoked):

  • Filing materially false or fraudulent Schedules and/or attempting to hide assets.  Although individuals occasionally submit Schedules and documents that are intentionally false in other ways, the usual reason is that they are trying to hide property from the Trustee and Estate.  This includes property they have transferred to someone else just before filing, as the Schedules and Statement of Financial Affairs ask for recent transfers. The examples of this can be endless, but typical examples include real property not disclosed or transferred to a relative, bank accounts, cash, jewelry, interests in businesses, and so on.  Before you get too nervous, it takes much more than simple errors or oversights to lose a discharge.  If you make a mistake, forgot about a closed bank account from three years ago, or a savings account that has been languishing for years with a $10 balance, it is not a problem. If you have a safe deposit box with gold bars and jewelry that you intentionally left off, it is a problem.  Good Bankruptcy lawyers can more than pay for themselves by taking all the time necessary to prepare and review Schedules, and remind you of items that may have been forgotten.  Schedules are signed under oath and under penalty of perjury, and hiding assets is a federal crime, so they do need to be taken seriously.
  • Lying under oath in a Court hearing, deposition or Rule 2004 Examination, or the First Meeting of Creditors.  Again, the theme is that when you come into Bankruptcy court and ask for a discharge, which is for the “honest but unfortunate debtor,” you and your finances and property are an open book. If you intentionally lie about an important issue, and you are caught, you may lose your discharge.
  • Failing to turn over Estate property to the Trustee or failing to cooperate with the Trustee.  Even if you fully disclose your assets, you have a continuing duty to turn over un-exempt property of the estate to the Trustee.  If there is a legitimate disagreement concerning the Trustee’s right to the asset, your lawyer will know how to get guidance from the Court.  It is not acceptable to just refuse to turn over the property.  Similarly, there is a duty to cooperate with the Trustee.  If the Trustee is selling your house, for example, you cannot interfere with the Trustee or real estate agent, or with the condition of the property.
  • Refusal to obey a Court Order.  Courts will not hesitate to enforce their orders with sanctions, including the loss of discharge.
  • A prior discharge in a recent case.  In a Chapter 7 case, if you have received a discharge in a prior case filed within 8 years of the current case, you are ineligible for a Chapter 7 discharge.  If you are in a Chapter 13 case, you must wait four years from the filing date of a previous Chapter 7 case, if you received a discharge in that case.  This prevents people from continuous cycles of getting in debt and filing for Bankruptcy every few years and it encourages creditors to extend credit to individuals after a discharge since they know the person cannot go back and get another discharge of the new debt.

Most proceedings to deny or revoke a discharge are filed in Chapter 7 cases, and the specific statute governing the issue is Section 727 of the Bankruptcy Code.  In a Chapter 13 case, the remedy for misconduct is typically to dismiss the case or convert it to Chapter 7 (after which the discharge may be denied).  In an individual Chapter 11 case, it may be dismissed, converted to Chapter 7 or a Chapter 11 Trustee may be appointed.   Corporations and business entities do not get discharges.

If there is a key point in Bankruptcy, it is to be honest regardless of your circumstances and cooperate fully with the Trustee, the Court and your lawyer.  As you can see above, most people get in trouble not because of their financial circumstances, but because they are not honest and cooperative.