The denial or revocation of a discharge takes place due to serious misbehavior by debtors, either in their behavior prior to or after a bankruptcy case is filed, or because of intentional misinformation in the bankruptcy petition, schedules or statements that the debtor files with the court.
In the last two blogs I’ve written about some of the scenarios in which a discharge can be denied or revoked. This week, we’ll look at other situations in which a debtor’s actions can place a bankruptcy discharge at risk.
The Debtor has acted or failed to act in a way prohibited by Section 727 in connection with another case filed by a relative or business partner. The prohibitions against false statements, destruction of property, failure to explain the loss of assets or to obey the lawful order of the court applies not only to the debtor’s own bankruptcy case. It can also extend to cases that a relative or business partner of the debtor files. If the debtor has assisted a relative or a business associate of a debtor in destroying property of the relative or business partner’s bankruptcy estate, or in the course of the other party’s bankruptcy case the debtor has made a false statement or refused to follow a lawful order of the court, then that debtor’s own discharge in a subsequently filed case can be at risk. There are limitations to this subsection of section 727: the misbehavior by a bankruptcy debtor on another person’s bankruptcy case must have taken place within one year prior to the debtor filing his or her own case, and the “other” case must be filed by what the bankruptcy court calls an “insider” - a relative or business partner of the debtor. While this situation rarely comes up, it is not unknown, since family members often are jointly liable for both consumer- and business-related debts, and since business partners typically jointly guarantee the debts of a business. The bottom line is that if there are financial obligations shared by family members or business partners that have overwhelmed the family or the business, all members who file a bankruptcy case need to fully disclose the nature of their assets and liabilities, and all of the individuals who file a bankruptcy case must cooperate with the case trustee in administering the case and follow the orders of the Bankruptcy Court.
If a debtor behaves in the way described above, or engages in the behavior that I set out in my two previous blogs, a debtor may either have a discharge denied - if the behavior is discovered prior to a discharge being entered, or the debtor, having already received a general discharge in a bankruptcy case can have his or her discharge revoked - that is, the discharge can be taken away from the debtor by the bankruptcy court, even though it had been entered.
To revoke a discharge, either the case trustee or a creditor must bring an action within a defined period of time after the debtor’s discharge has been entered. If the allegation that supports the action to revoke a discharge is that the debtor acted in a fraudulent way, the party seeking the revocation of discharge must bring that action no later than one year after the debtor’s discharge was entered, and the objecting party must prove that the objecting party was not aware of the debtor’s fraudulent behavior until after the debtor’s discharge was entered.
If the allegation that supports the action to revoke a discharge is that the debtor failed to disclose property of the bankruptcy estate in the debtor’s schedules or that the debtor made a false oath in testimony or in the bankruptcy petition, schedules and statements, or the debtor refused to follow a lawful order of the court, the objecting party must bring the action within one year after the debtor’s discharge has been entered, or prior to the date the debtor’s case is closed, whichever is later (the debtor’s case is closed at some point after discharge).
The case trustee, the United States trustee or a creditor of the debtor can ask the Bankruptcy Court to deny the debtor’s discharge if it has not already been entered. After the debtor’s discharge has been entered, the United States Trustee or a creditor can ask that the debtor’s discharge be revoked.
Whatever party seeks the denial of, or revocation of a debtor’s bankruptcy discharge has to bring an adversary action against the debtor in Bankruptcy Court. It is not easy to “settle” a denial/revocation action, since any settlement has to be in writing, disclosed to the case trustee and the United States trustee and be approved by the Bankruptcy Court. For many years, the rule of thumb was that while the trustee (whether the case trustee or United States trustee) could settle a denial/revocation action, creditors could not, since the creditors could not act independently of the trustee. However, this rule has softened in some jurisdictions and provided that a settlement will be honored if the Bankruptcy Court finds that the settlement is fair and equitable and in the best interests of the bankruptcy estate.
The reality of experience is that creditors rarely bring an action to deny or revoke a discharge. Rather, creditors are much more likely to ask the court to except the debtor’s obligation to the creditor from the debtor’s general discharge. Why? The reason if fairly straight-forward: if a debtor has his or her discharge denied or revoked, then all of that debtor’s debts are not discharged, and any or all of the debtor’s creditors can then pursue the debtor for collection. On the other hand, if only the debtor’s debt to one creditor is excepted from the debtor’s discharge, there’s only one creditor that can collect from the debtor - there’s no competition in a creditor who successfully excepts a debt from discharge from receiving payment from a bankruptcy debtor.
There are some other scenarios in which a debtor who does not misbehave might be denied a bankruptcy discharge; we’ll look at that in some detail next week.