Objections to Discharge in Bankruptcy Cases & Legal Implications
A debtor usually files for bankruptcy to obtain a discharge of their debts. However, a creditor, a Chapter 7 bankruptcy trustee, or the U.S. Trustee or Bankruptcy Administrator sometimes will argue that a debt that technically qualifies for a discharge should not be discharged for a certain reason. They also might argue that the bankruptcy case should be dismissed in its entirety. A creditor or trustee can file an adversary proceeding if they are alleging fraud by the debtor that prevented a creditor from being paid. This might have occurred before or during the bankruptcy. By contrast, if the debtor is not entitled to a discharge because they received a previous discharge too recently, a party can file a motion within the bankruptcy proceeding.
In either case, a party filing an objection must take action within 60 days from the Section 341 meeting of creditors in most situations. If the objection leads to an adversary proceeding, a long period of gathering evidence may ensue. Unless the parties can reach a settlement, a judge will rule on the objection at a trial. If the objection fails, the debt will be discharged. If the objection succeeds, the debtor will need to repay the debt.
Objecting to a Single Debt
If a debt arose from the debtor’s intentional wrongdoing, the creditor can object to discharging it. This might involve damages related to a drunk driving accident, for example, or costs caused by intentional damage to an apartment or other property. Charges of certain amounts on credit cards within 90 days of filing for bankruptcy also may support an objection to discharging that type of debt. Or perhaps the debtor made false statements when they were applying for a loan. Most objections to a single debt are based on wrongdoing by the debtor before the bankruptcy filing.
Objecting to a Discharge Generally
By contrast, most objections to a general discharge are based on wrongdoing by the debtor during the course of the bankruptcy. This might be appropriate when the debtor lied to the bankruptcy judge or trustee, made false statements on the bankruptcy petition, fraudulently transferred title to property, destroyed property, or disregarded a court order.
Individual creditors usually do not file an objection to a general discharge, instead filing an objection to a discharge of the specific debt owed to them. A Chapter 7 bankruptcy trustee might raise a general objection, or the U.S. Trustee or Bankruptcy Administrator might object to a discharge generally if they suspect inaccurate information in the bankruptcy petition upon auditing it.
Penalties for Debtors Based on Successful Objections
If fraud forms the basis of an objection, the debtor might have their case dismissed if the objection succeeds. They might even face criminal charges if their conduct was egregious. If objections arise from a different basis, they probably would not lead to severe penalties. These objections might be a way to clarify whether a debt is dischargeable when the situation is ambiguous. The parties might not be sure whether a certain debt qualifies as a priority debt, which is non-dischargeable, or there might be a dispute about the nature of a tax debt.
