When someone decides to file for Chapter 7 bankruptcy, it is usually the result of unforeseen and overwhelming circumstances that impair his or her ability to meet financial obligations. Rarely does someone use bankruptcy as a means of eliminating a debt he or she could otherwise pay.

Chapter 7 bankruptcy is a liquidation process and is the type most often used to wipe out consumer debt. Most Chapter 7 debtors do not own property subject to sale by the bankruptcy trustee because if they did, another type of bankruptcy would typically be used. When no property is available, or that which is available to pay creditor claims is insufficient to meet the obligations, Chapter 7 bankruptcy will wipe out the debt. Unfortunately, not every category of debt is dischargeable, and child support, back taxes, and student loans will survive bankruptcy regardless of the type of judicial relief pursued.

In addition to debt that is nondischargeable, a debtor can also have a discharge denied if certain violations of court rules are made or legal requirements are not satisfied. The U.S. Supreme Court recently addressed the ability of courts to deny discharge in cases involving alleged fraud by a debtor. Typically, fraudulent misrepresentation will result in some or all of the debtor’s debts being denied discharge, unless there is an exception, which lies at the heart of the Supreme Court’s decision. A discussion of the Court’s decision and the procedural and legal issues that can provoke a court to deny discharge, a measure that would entirely negate the purpose of the bankruptcy, will follow below.

The Supreme Court’s Decision

The main issue in this case was a statement made by a legal client to his attorney that an upcoming tax return would be used to pay his $60,000 legal bill incurred after representation. However, instead of using the monies to pay his former attorneys, the man used it to for his business, and later filed for Chapter 7 bankruptcy protection after the law firm sought to enforce a judgment to collect. As mentioned above, fraudulent representations about one’s financial condition is grounds to deny discharge. However, an exception to this rule says the discharge may be denied only if the alleged misrepresentation is in writing, and in this case, the promise of payment was purely oral. Further, the Court focused on the type of information that would constitute a debtor’s financial position, and held in a unanimous decision that a statement about a single asset is enough to encapsulate a debtor’s financial position, and does not require a sweeping overview of all outstanding financial obligations and abilities to pay in order for discharge to be allowed. While making a fraudulent misrepresentation is never encouraged or advisable, this case does show that creditors cannot block discharge without written statement concerning payment if the debt is otherwise dischargeable.

Grounds to Deny Discharge

In addition to certain debts that are classified as nondischargeable, violations of the rules and procedures of the bankruptcy process can also bring about the same result. Examples of issues that can lead to a denial of discharge include:

• Not submitting required tax documents;
• Failing to complete the mandatory personal finance management course;
• Hiding or transferring property to prevent creditors from being paid;
• Destroying records;
• Committing perjury or engaging in fraudulent acts;
• An inability to explain lost assets;
• Violating a court order; or
• Obtaining a discharge in bankruptcy and refiling before enough time has elapsed between petitions.

Get Help

Bankruptcy can provide the relief you have been seeking, but the process to get the discharge you need to move on is technical and complicated. Christopher L. Arrington, P.C. understands the laws and procedures that regulate bankruptcy, and will guide you a financial process that best serves your needs and boundaries of the law. Contact the Danville law firm to schedule an appointment.