For most people who file bankruptcy, discharge is the goal. In exchange for that discharge, the bankruptcy system requires that a Chapter 7 or Chapter 13 debtor—the person who files a bankruptcy case—give up nonessential assets which will be distributed to creditors to satisfy debts. Filing for bankruptcy, giving up assets, and then losing your discharge can happen, so it's important to follow legal advice and be upfront about everything involving your case.
Why Discharges Get Denied
Bankruptcy cases demand honesty and cooperation. If you fail to be honest in your paperwork or in your dealings with the court, or you fail to cooperate with the court or your trustee, your case can be dismissed or you can be denied a discharge, but still have to abide by other bankruptcy requirements. Some of the reasons your discharge could be denied include:
- You hid property.
- You destroyed your financial books or records.
- You made false statements, orally or in writing, about your assets, earnings, and debts.
- You failed to explain or account for the loss of property or money.
- You failed to complete a required credit counseling or financial management course.
- You violated a court order.
- You failed to disclose a prior bankruptcy case.
- You received a Chapter 7 bankruptcy discharge within the past eight years or a Chapter 13 discharge within the past six years.
The first step in seeking to deny the discharge of a debtor is to file a complaint. This starts a lawsuit within the bankruptcy case, commonly called an adversary complaint. The complaint is a document usually filed by the bankruptcy trustee or a creditor, setting forth why the debtor should not receive the discharge.
Under the Bankruptcy Code, a complaint to deny your discharge can be served on you by mail at the address on your bankruptcy petition. This is different from other lawsuits, where you must be personally served.
After you are served with the complaint, you have 30 days to file your response, which generally will come in one of two forms: an answer or a motion to dismiss. However, these types can be combined into one document. An answer replies to the factual statements in the complaint and must admit or deny each. A motion to dismiss is a legal maneuver that is more complex and requests that the court dismiss the complaint because it is legally deficient in some way. Many bankruptcy courts keep forms for complaint answers for debtors who do not have lawyers. If you do not answer the complaint or file some sort of response, a default will be taken, which means that the other party wins automatically.
Going to Court and Trial
The process varies from court to court, but the bankruptcy court typically will require you to appear in court at least once prior to trial. You will have a moment to speak with the judge about the case. Generally, these appearances relate only to the scheduling of future events, such as discovery and trial.
If you are sued and the lawsuit is seeking to deny your bankruptcy discharge, you need to hire a lawyer that specializes in bankruptcy litigation.
At trial, the person who filed the complaint will have to prove that it is more likely than not that you lied on your bankruptcy petition or committed some other act or omission that should result in the denial of your discharge.
If the bankruptcy judge rules against you, he will enter a judgment denying your discharge. That doesn't mean that your case is over. If you have nonexempt property, the trustee still can take it and use it to pay your creditors. So, losing your discharge means you will not receive the benefit of having filed the bankruptcy case, but you'll still lose your property.
If the court enters a judgment against you, you also might have to worry about whether you'll be prosecuted on criminal charges. Many of the same offenses that can lead to the denial of discharge are federal crimes. If the judge believes it is warranted, he can refer your case to the Department of Justice for investigation.