The primary goal of filing a Chapter 7 Bankruptcy is to obtain a Discharge of debts from the Bankruptcy Court giving the Debtor the “fresh start.” The bankruptcy discharge is a powerful tool that eliminates credit card debt, medical bills, personal guarantees, and personal liability for judgment debts. However, not every consumer who enters bankruptcy is guaranteed a fresh start. Here in New Jersey, we emphasize to all our clients the importance of being open and honest with the court. Honesty combined with an experienced bankruptcy lawyer is the best way to get through bankruptcy with your discharge intact.
What are the grounds for denying a discharge?
In most cases, there is no proceeding brought challenging the debtor’s right to discharge, however, the Bankruptcy Code does provide grounds for such a challenge. Challenges to discharge come in the form of a lawsuit, known as an adversary proceeding, which is typically filed by a creditor or the trustee.
A discharge may be denied by the Court if one of the following factors is shown to be present:
- A transfer or concealment of property with the intent to hinder, delay, or defraud a creditor or Trustee;
- Destroying or concealing financial records;
- Making a false oath or account, presenting or using a false claim, withholding books/records from the trustee;
- Failing to explain satisfactorily the loss or deficiency of an asset;
- Refusal to obey an order of the court or to testify after being granted immunity;
- Received a Chapter 7 or Chapter 11 discharge in a case commenced within the previous 8 years;
- Received a Chapter 12 or 13 discharge in a case commenced within the past six years under certain circumstances,
- Executed a written waiver of discharge approved by the court,
- Failed to complete an approved financial education course after filing the petition.
The Bankruptcy Code – Section 727
It’s written in legalese, but a complete list of the reasons a court will deny a bankruptcy discharge can be found at 11 USC Section 727. As you look through the list we’ve assembled above, you’ll notice that there are two macro level reasons your discharge can be denied.
As we said above, the best way to get a discharge is to be open and honest with the court. This means telling your attorney about all of your property, disclosing that property on your schedules, and refraining from any cute stuff, like transferring assets out of your name. As long as you’re open and honest, bankruptcy has the potential to provide tremendous relief.
The bankruptcy court has full access to all of your financial information and it’s unlikely that you’ll be able to hide anything. If you do fail to disclose all the necessary information about all of your assets and sources of income, the court may find that you’ve acted in “bad faith.” That’s a legal term that means that you filed bankruptcy in order to game the system. That will get your case dismissed, meaning you’ll have to go through the whole process again. However, a dismissal doesn’t necessarily stop the bankruptcy process. The trustee may continue to liquidate your assets and pay your creditors, but you won’t get the discharge at the end and you’ll be left facing your debts. In serious cases, you may actually face jail time or fines for attempting to defraud the court. Put simply, be honest with the court. Lying in a bankruptcy case can land you in serious trouble.
Certain behavior before filing a bankruptcy may also indicate to the court that you filed in bad faith. For example, if you charged a stack of luxury purchases to your credit card just before filing your bankruptcy, your credit card issuer may argue that you made those purchases without ever intending to repay the debt. The court may choose to dismiss your case for filing in bad faith. Transfers of property to friends and family members are also suspicious to the court; they’ll look carefully at the transactions to determine whether you were just trying to keep certain assets out of the bankruptcy process. If the court decides you were just trying to avoid losing certain property in bankruptcy, that transaction may be declared fraudulent and the court may reverse it or dismiss your case and deny your discharge.
Finally, you have to be careful about who you repay before you file a bankruptcy. If you repay certain creditors in full while failing to make payments on other debts and then you file for bankruptcy, the court will closely examine those payments to determine whether those payments were legitimate. They may be deemed “preferential payments,” meaning that you treated a certain creditor differently than you treated other creditors and those payments may be “clawed back” into your bankruptcy estate. The court wants to ensure that all your creditors are treated the same way, so you can’t repay just one and then file a bankruptcy to escape the others. This arises most commonly when debtors attempt to repay debts to friends and family members before filing.
Next, there are limitations placed on previous bankruptcy filers. As a general rule, you’re only entitled to a bankruptcy discharge in Chapter 7 every eight years. If you filed Chapter 7 recently, the court won’t allow another discharge of debts until the eight year period has passed since you last filed a case.
If you file too many times, the court may also find that you’re filing in bad faith. Repeated filings without ever reaching discharge can signal that you’re just using the bankruptcy law to protect certain property or avoid certain creditors without any real intention of getting your finances back on track. If you file over and over again, the court may dismiss your case and bar you from filing again for a certain amount of time.
Consult an Attorney
If you’re considering a bankruptcy, gather all your financial records and meet with one of our experienced New Jersey bankruptcy attorneys for a free consultation. We can help you decide if bankruptcy is right for you and, if so, when is the best time for you to file and how to show the court that you’re filing in good faith.