Chapter 5, I. Discharge

• Jurisdiction: United States

I. Discharge

As provided in 11 U.S.C. § 524, a bankruptcy discharge operates as a continuing stay after the close of the case to enjoin acts to recover or offset discharged debts as to the personal liability of the debtor.¹⁴⁰ However, the discharge of the debtor from personal liability is distinguishable from the debt itself.¹⁴¹ The debt still exists and can be collected from any other entity that may be liable, including an insurer. "The discharge in bankruptcy, along with the coextensive permanent injunction and fresh start, are exclusive to the debtor and do not otherwise affect the enforcement of any underlying debtor or any non-debtor liability thereon."¹⁴²

The courts have been nearly unanimous in holding that a post-discharge injunction does not prohibit a creditor from proceeding against the debtor nominally for the purposes of establishing liability as a prerequisite to proceeding against the debtor's insurer.¹⁴³ The courts reason that because the suit is merely to collect insurance proceeds and not the plaintiff's full damages should they exceed insurance coverage, there is no personal liability of the debtor and thus it does not infringe on the discharge.¹⁴⁴

Nevertheless, under the right circumstances, a court may find that the discharge of the obligation against the debtor also prevents pursuit of the claim against the insurer. One court held that a claimant could not pursue a claim against the insurer after the debtor obtained a discharge of that obligation. The case involved a post-petition pre-confirmation claim that was discharged in a confirmed plan of reorganization. There was an excess insurance policy that provided that the insurer "shall indemnify the INSURED for any and all sums which the INSURED shall become legally obligated to pay as ULTIMATE NET LOSS by reason of liability imposed upon the INSURED by law ... because of BODILY INJURY, PERSONAL INJURY... (emphasis added [by court])."¹⁴⁵ If a court allows a creditor to proceed against a debtor nominally, however, the creditor's ultimate recovery is limited to available insurance coverage.¹⁴⁶

Both corporate and individual debtors are eligible to obtain a discharge. A corporate debtor, however, is not entitled to a discharge unless it will continue to do business as a reorganized debtor through a confirmed chapter 11 plan.¹⁴⁷ A corporate debtor that either liquidates through a chapter 11 plan or through a chapter 7 proceeding is not entitled to a discharge.¹⁴⁸

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