Obligation To Be Honest in Bankruptcy

Posted by Kevin on January 28, 2018 under Bankruptcy Blog | Comments are off for this article

A constant theme in consumer bankruptcies is that a fundamental purpose of bankruptcy is to give the honest but unfortunate debtor a fresh financial start.

The fresh start is effectuated, in part, by allowing a debtor to get a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.

Exceptions to Getting a Discharge

There are two types of exceptions to the discharge of your debts.  The first excepts discharge as to specific debts (while the remainder of the debts are discharged).  The second excepts discharge as to all of your debts.

1.  Specific Debts Not Discharged

Many of my clients have a general understanding that certain debts may not be dischargeable.  They are surprised , however, when they find out how many different debts are or may not be dischargeable.  The Rules indicate that the debtor or any creditor may file an action relating to the dischargeablilty of a debt.  However, in practical terms, these debts fall into 3 groups based on how the debtor and her attorney may decide to deal with with the issue of dischargeability during the course of the bankruptcy.

• debts such as unpaid child support are never dischargeable and, for the most part, no special action need be taken by either the creditor or debtor;
• debts including  income taxes and  student loans are dischargeable but only under certain conditions.  Since the taxing authority and student loan holder will usually begin collection efforts upon the conclusion of the bankruptcy, the onus usually falls on the debtor to apply to the court for a determination relating to dischargeability; or
• debts incurred through misrepresentation or fraud are deemed dischargeable unless  a creditor objects AND successfully proves the misrepresentation to the satisfaction of the court.

2. NO Debts Discharged

The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever in a Chapter 7 case.

The following kinds of dishonesty could result in not being able to discharge your debts in a Chapter 7 case:

• Hiding or destroying assets during the year before filing bankruptcy
• Hiding or destroying assets after the bankruptcy case is filed
• Hiding, destroying, falsifying, or failing to keep records about your financial condition
• Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
• Making a false oath.

Actions to deny discharge of all debts can be brought by a creditor, the trustee assigned to the case, or the United States Trustee’s office.  A negative result is devastating to a debtor.  At a seminar, I recall a judge referring to this type of denial of a general discharge as a death sentence for a debtor.

Conclusion

Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.