key component to Chapter 7 bankruptcy, also known as a liquidation bankruptcy,
is the discharge of debts that the creditor is unable to pay.
In its most basic form, a Chapter 7 bankruptcy is one in which a debtor,
in cooperation with a court-appointed bankruptcy trustee, will sell or
liquidate certain assets. The proceeds of the asset liquidation are then
used to pay a portion of all debts as determined by the trustee and approved
by a court. Those debts or portions of those debts that the debtor are
unable to repay are then written off, or discharged.
Once a debt is discharged, the debtor is free of all obligation to repay
However, the system does not work unless the debtor is honest to all parties
– creditors, trustee, and the court handling the case – at
all times and at all points during the process. Bankruptcy was created
to give an honest debtor who, through no fault of their own, has accumulated
far more debt than they can reasonably be expected to repay. The system
will not work unless the debtor is honest and transparent in their dealings
throughout the bankruptcy process.
If a debtor breaks that trust, serious consequences can ensue.
One of those consequences is the objection to discharge. This occurs when
a creditor feels the debtor has been dishonest in representing the assets
they have available to repay their debt and are attempting to cheat the creditor.
Although the ultimate goal of a liquidation bankruptcy is a discharge of
debts, a discharge is not necessarily guaranteed.
Creditors have a legal right to object to a debt discharge.
If a creditor decides to challenge a discharge and is successful, the debtor
may find themselves liable for the entire amount owed to that specific
creditor. The court can and often will discharge the remaining debts included
in the bankruptcy filing. Although creditors who challenge a discharge
will often work out a lower settlement, it is very, very common for a
creditor to petition the court for exemption from the bankruptcy discharge
and demand full payment.
If the court finds the debtor’s actions particularly egregious, the
judge may refuse to grant the bankruptcy completely or not to discharge
any of the debtor’s debt.
The key to avoid a discharge challenge is to simply be honest and as financially
responsible as possible in the days leading up to your bankruptcy. For
two red flags guaranteed to trigger a challenge are to run up excessive, additional credit card debt within 90 days of
your bankruptcy filing, or to take out large or excessive cash advances
or loans within 90 days of your filing date.
In such cases, creditors will assume that the debtor is making a final
run at accumulating debt prior to the bankruptcy in the hopes that the
debt will simply be discharged. This would leave the creditors holding
debt that they can never collect from the debtor.
An honest debtor can avoid these complications, and can emerge from bankruptcy
with a bright new financial future
If you feel bankruptcy is right for you,
contact us today to see what our experienced legal team can for you.