Denial or Revocation of a Chapter 7 Discharge

Only individuals can receive a Chapter 7 discharge. The only reason a business would file Chapter 7 is to liquidate its assets and distribute the proceeds to its creditors. It is not entitled to any exemptions nor does the fresh start policy apply to a business, since after the Chapter 7 liquidation, the business ceases to exist.

Although there are grounds for denying a discharge to an individual under any chapter of bankruptcy, there are special cases, enumerated in §727 of the Bankruptcy Code, that apply specifically to a Chapter 7 bankruptcy. Most grounds of denial under this section result from the debtor's bad conduct or abuse of the bankruptcy process.

However, one basis for denying the debtor a discharge that is not based on misconduct or abuse is the failure to take the personal financial management course, a requirement added by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This addition was passed because it was frequently observed that debtors managed their money poorly, and so Congress hoped that this debtor education would improve the financial position of the debtor after receiving a discharge. The course must be approved by the U.S. Trustee, who maintains a website that lists the currently approved courses. The trustee may waive this requirement if, because of severe disability or because of active military duty in a combat zone, the debtor is unable to take the course. Although the requirement may also be waived if there are no approved courses available locally to the debtor, this provision will probably never be used since most personal financial management courses are provided over the Internet or by telephone, so the lack of a local classroom is no hindrance to taking the course.

The debtor may also not get a discharge if he signed a written waiver of the discharge and it was approved by the court.

Improper Conduct

Because bankruptcy depends greatly on the information provided by the debtor and on his cooperation in conducting the bankruptcy, a discharge can be denied if the debtor is found guilty of dishonest or unlawful behavior, or if he does not cooperate either with the trustee or the court.

The improper conduct includes:

• the transfer, destruction, or concealment of the debtor's property or of the bankruptcy estate, within 1 year of filing for bankruptcy or during bankruptcy;
• failure to keep or withhold documents and other written records regarding the finances of the debtor and his business;
• making false statements;
• failing to explain the loss of assets; or
• failure to answer questions, testify, or obey court orders.

Sometimes, the bankruptcy petitioner is involved in a business that was in financial stress, causing not only the debtor's own bankruptcy but also that of others, and the debtor may improperly interfere with the other case, especially if the other bankruptcy involves a friend, relative, or business partner, known collectively as insiders. If the debtor has committed any of the improper conduct listed above in the other bankruptcy case, either within 1 year of his own petition or while his bankruptcy is pending, then his own discharge may be denied.

Bankruptcy Abuse

Since bankruptcy was designed to give a fresh start to an honest debtor, abuse of the bankruptcy process may prevent the petitioner from receiving a discharge.

Serial Bankruptcies

Most people learn from their mistakes that caused them to file for bankruptcy, so they tend to avoid financial mistakes that would cause them to file again, especially soon afterward. People who file repeatedly are probably abusing the system.

To discourage serial filings, a debtor who received a Chapter 7 discharge may not receive another Chapter 7 discharge within 8 years of the commencement of the prior Chapter 7.

If the prior bankruptcy was under Chapter 13 or 12, then the petitioner cannot receive a discharge within 6 years from the commencement of the prior case, unless the petitioner paid:

• 100% of his unsecured claims, or
• at least 70% of unsecured claims
  • where the payment plan was proposed in good faith and
  • it was the petitioner's best effort.

Homestead Reduction

If a bankruptcy case is filed in a state that has a generous homestead exemption that exceeds $146,450, then the court cannot grant a discharge if it has any reasonable basis, after a notice and a hearing, for believing that the petitioner was convicted of a felony and that the pending case would be an abuse of the process, or it the petitioner incurred a liability because of any improper conduct listed in §523(q)(1):

• violations of the Federal security laws;
• fraud, deceit, or manipulation as a fiduciary;
• any civil remedy under section 1964 of title 18;
• or any criminal act, intentional tort, or willful or reckless misconduct resulting in the injury or death of another individual within the preceding 5 years.

If §523(q)(1) applies, then the homestead exemption is limited to $146,450.

Revocation of the Chapter 7 Discharge

A Chapter 7 discharge can also be revoked because of the debtor's fraud, concealment, or disobedience. If a creditor, trustee, or the U.S. Trustee discovers any grounds for revocation, it can apply to the court to have the discharge revoked. If the discharge was obtained by the debtor's fraud that was not discovered until later, then a creditor, trustee, or the U.S. Trustee can, within 1 year of the granting of the discharge, apply to the court to have the discharge revoked.

A discharge can also be revoked if the debtor was found — within 1 year of the discharge or the closing of the case, whichever is later — to have concealed property or the debtor's entitlement to property that should have been part of the bankruptcy estate.

According to §727(d)(3), a discharge can also be revoked — within 1 year of the discharge or the closing of the case, whichever is later — if the debtor disobeyed a court order, or failed to testify or to answer a material question, although, in this case, it is difficult to imagine why the court would even grant a discharge in the 1^st place.