Chapter VII Discharge

• Jurisdiction: United States

VII. Discharge

A. Introduction

Most debtors who come to bankruptcy are there to get a discharge, and most of them get it. This is remarkable for a concept that is, from the long view of history, something of an afterthought. Bankruptcy was first of all a creditor-collection device. Only later (1705, to be exact) does the legislature come up with the idea that a debtor who cooperates with the bankruptcy process might get relief from liability on his debts. At least since 1898, "discharge" has reigned as the central feature of U.S. bankruptcy law. Creditor collection survives as — well, not exactly an afterthought, but as a less-visible pervasive aspect of the process.

Individuals can get a discharge in chapter 7, 11 or 13. Corporations can get a discharge when they reorganize under chapter 11. Corporations cannot get a discharge in chapter 7 (and are not even eligible for chapter 13), but this is a distraction; the corporation is an abstract entity, and if you are simply abandoning it, there is no point to getting a discharge.

B. Discharge vs. Dischargeability

Here is a vital distinction between discharge and dischargeability:

• The discharge relieves the debtor from liability for debts in general.
• The dischargeability of individual debts means that although the debtor gets his discharge, some individual debts may be excepted from discharge or declared nondischargeable.

For example, the court may deny the discharge if the debtor "made a false oath" in or in connection with the case [§ 727(a)(4)(A)]. This means that the debtor remains liable for all her pre-bankruptcy debts, just as if she had never gone into bankruptcy. On the other hand, the Code provides that most tax debts are excepted from discharge [§ 523(a)(1)]. The debtor who owes taxes before bankruptcy may continue to do so after bankruptcy, even though the debtor gets a discharge.

Any creditor or the trustee may bring an action to block the discharge. The action may be brought only in bankruptcy court, and only as part of the main bankruptcy case. Actions seeking an exception to discharge may be brought by the affected creditor. Sometimes, they must be brought in the bankruptcy court; other times they may be brought either in the bankruptcy court or in any other court with jurisdiction over the claim [§ 523(c)(1)].

The same facts might give rise to grounds for denial of a discharge and for an exception to dischargeability. For example, suppose the debtor, before bankruptcy, induced a creditor to lend money to him by using a false financial statement. Then, when things started to go badly for him, he transferred property with the intent to hinder, delay or defraud the creditor. These facts might support either an action to deny a discharge (under § 727(a)(2)(A)) or an action for an exception to discharge (under § 523(a)(2)). The aggrieved creditor might bring either action. Indeed, it might bring both, although it can really "win" only one.

There is an interesting wrinkle here, though: Given a choice, the creditor would rather lose the harsher, more pervasive discharge action and win the milder, less punitive dischargeability claim. Why is this so? The answer is that if the creditor wins the action denying the discharge, it keeps all the old claims alive, so there are just as many creditors as before. If the creditor wins the dischargeability action but loses the discharge action, then the debtor gets his discharge and the one creditor's claim survives with no competitors. Put another way, vis-a-vis all other creditors, any one creditor is the debtor's ally.

C. Timing

The first fact about the discharge is that you can get it only once every eight...