Discharge and Dischargeability in Bankruptcy: A Paralegal Study Guide

The discharge is the central benefit of bankruptcy for an individual debtor. It is the court order that releases the debtor from personal liability for certain debts and gives the debtor a fresh financial start. Paralegals who assist bankruptcy attorneys must understand what a discharge does, which debts survive it, and what deadlines apply. These concepts appear regularly on paralegal certification exams.

What Is a Bankruptcy Discharge?

A discharge is a permanent injunction against collection of discharged debts as personal liabilities of the debtor. Under the Bankruptcy Code, once the discharge is granted, creditors holding discharged debts may not sue, call, send collection letters, or otherwise try to collect from the debtor personally. A creditor who violates the discharge injunction can be held in contempt of court and may owe damages and attorney fees.

It is important to remember that a discharge eliminates personal liability, not necessarily liens. A secured creditor with a valid lien on property can still enforce the lien against the collateral even after the debtor has been discharged from the underlying debt. This is why a debtor who wants to keep a car or a home must usually keep making payments or otherwise deal with the lien.

Who Receives a Discharge?

Chapter 7

In a Chapter 7 liquidation case, an individual debtor generally receives a discharge a few months after filing, typically around sixty to ninety days after the meeting of creditors if no one objects. Corporations and partnerships do not receive a Chapter 7 discharge.

Chapter 13

In Chapter 13, the debtor completes a three to five year repayment plan, and the discharge is granted after the final plan payment. The Chapter 13 discharge is broader than the Chapter 7 discharge, reaching some debts that cannot be discharged in Chapter 7.

Chapter 11 and Chapter 12

Discharge in these chapters generally occurs upon confirmation of the plan or completion of payments, depending on the type of debtor and the plan terms.

Grounds for Denial of Discharge

Some debtors are denied a discharge entirely. Under the Code, a court may deny a Chapter 7 discharge when the debtor has engaged in conduct such as the following.

• Transferring, concealing, or destroying property within one year before filing with intent to hinder, delay, or defraud creditors.
• Concealing, destroying, or falsifying financial records.
• Making a false oath or account in the case.
• Failing to explain satisfactorily a loss of assets.
• Refusing to obey a lawful court order.
• Receiving a prior Chapter 7 discharge within eight years of filing the current case.
• Failing to complete a required financial management course.

Paralegals play an important role in prevention by helping clients gather complete and accurate documents and by reminding clients that schedules and statements are signed under penalty of perjury.

Non-Dischargeable Debts

Even when a discharge is granted, certain categories of debt survive. Some are automatically excepted from discharge, while others are excepted only if the creditor files a timely complaint and proves its case.

Debts Automatically Non-Dischargeable

• Domestic support obligations: child support and alimony.
• Most tax debts: recent income taxes, taxes for which no return was filed, and fraudulent returns, subject to specific timing rules.
• Student loans: generally non-dischargeable unless the debtor proves undue hardship in an adversary proceeding.
• Fines, penalties, and restitution: amounts owed to governmental units for violations of law, including criminal restitution.
• Debts for death or personal injury from drunk driving.
• Debts not listed in the schedules: in certain circumstances, a creditor who was never notified may keep its claim.

Debts Non-Dischargeable Only on Creditor Complaint

Some debts are excepted only if the creditor timely files an adversary complaint. These include debts obtained by false pretenses, false representations, or actual fraud; debts arising from fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; and debts for willful and malicious injury. The deadline for filing such a complaint is generally sixty days after the first date set for the meeting of creditors. If the creditor misses that deadline, the debt is discharged.

Dischargeability Proceedings

A dischargeability action is an adversary proceeding, which is a lawsuit within the bankruptcy case governed by Part VII of the Federal Rules of Bankruptcy Procedure. The creditor files a complaint, the debtor answers, and the court decides after discovery or trial. The creditor bears the burden of proof, generally by a preponderance of the evidence. A paralegal may assist with drafting the complaint or answer, calendaring the deadline, gathering evidence such as bank statements and credit applications, and preparing exhibits.

Reaffirmation and Waiver

A debtor may voluntarily agree to repay a dischargeable debt through a reaffirmation agreement. To be enforceable, the agreement must be filed with the court, include required disclosures, and be made before the discharge is granted. If the debtor is not represented by an attorney, the court must hold a hearing and find that the agreement does not impose an undue hardship. Debtors may rescind a reaffirmation agreement within a limited time.

Revocation of Discharge

A discharge can be revoked if it was obtained through fraud that the requesting party did not know about until after the discharge was granted, or if the debtor acquired property of the estate and knowingly failed to report it. The trustee, a creditor, or the United States trustee may request revocation within strict time limits.

Frequently Asked Questions

Does a discharge erase all debt?

No. It eliminates personal liability for dischargeable debts only. Non-dischargeable debts and valid liens remain.

Can student loans ever be discharged?

Yes, but only if the debtor files an adversary proceeding and proves that repayment would impose an undue hardship. Courts apply tests such as the Brunner test or a totality of the circumstances approach.

What is the difference between a discharge and a dismissal?

A dismissal ends the case without relieving the debtor of any debts. A discharge is a ruling that releases the debtor from liability on eligible debts.

How long does a creditor have to challenge dischargeability?

For fraud based exceptions, usually sixty days after the first date set for the meeting of creditors, unless extended by the court.

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