Bankruptcy Objections To Discharge: Credibility Is Key to Avoid Costly Challenges to Discharge

A 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 that debt.

Filing Bankruptcy? Be Honest at All Times.

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.

Consequences of Dishonesty During the Bankruptcy Process

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, then 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.

Common Causes for a Discharge Challenge

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 instance, two red flags guaranteed to trigger a challenge are to:

• Run up excessive, additional credit card debt within 90 days of your bankruptcy filing
• 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.