Being Honest in Bankruptcy
Jan. 8, 2018
It’s really not hard to do the most important thing to have a successful bankruptcy case—be honest with your lawyer and throughout your case.
The U.S. Supreme Court described the purpose of consumer bankruptcy way back in 1934 as follows:
… it gives to the honest but unfortunate debtor… a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.
Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This case involved a loan of $300 made near the beginning of the Great Depression. Hunt, the debtor, had signed an assignment of future wages for payment of the debt to the Local Loan Company. The Supreme Court held that this assignment became invalid when the debt was discharged in bankruptcy. The Court rejected state laws to the contrary. It said:
The new opportunity in life and the clear field for future effort… would be of little value to the wage earner if he were obliged to face the necessity of devoting the whole or a considerable portion of his earnings for an indefinite time in the future to the payment of indebtedness incurred prior to his bankruptcy.
292 U.S. 234, 245. So, if you are an “honest but unfortunate debtor,” the very powerful tools of bankruptcy are available to you.
Receiving that “New Opportunity in Life”
In most consumer bankruptcy cases, the person filing the case gets a discharge of his or her debts. “Discharge” is the permanent legal write-off of debts. The law says that all debts get discharged, except those that fit specific exceptions.
The U.S. Bankruptcy Code says that in a Chapter 7 “straight bankruptcy” case the bankruptcy “court shall grant the debtor a discharge,” with only certain narrow exceptions. (See 11 U.S.C. Section 727(a).)
It’s very much the same in a Chapter 13 “adjustment of debts” case. The “court shall grant the debtor a discharge of all debts,” again with only certain narrow exceptions. (See Section 1328(a) of the Bankruptcy Code.)
As long as those exceptions don’t apply to your debts, they will get discharged in bankruptcy. As long as you discharge enough debts, you’ll have that new financial opportunity in life.
Exceptions to Getting a Discharge
There are two sets of exceptions to discharging your debts. There are those that determine whether you can discharge:
certain specific debts, and
any of your debts.
1. Non-Dischargeable Debts
You’ve more likely heard about the first set, the specific kinds of debts that can’t be discharged. These include certain taxes, criminal fines, and student loans. These various kinds of debts bankruptcy does not discharge for many reasons. These reasons fall into 3 groups. Bankruptcy does not discharge:
another group under certain conditions, such as income taxes (Section 523(a)(1)); or
a final group if a creditor objects AND successfully proves certain facts, such as debts incurred through misrepresentation or fraud by the debtor (Section 523(a)(2)).
2. NO Debts Discharged
The second, less familiar set of exceptions is actually more dangerous. That’s because these doesn’t affect just a specific debt or two. Rather this set of exceptions affects your ability to receive a discharge of ANY of your debts whatsoever. (Section 727(a)(2)-(7))
You cannot be dishonest in the midst of your bankruptcy proceeding itself. If you are you may lose the ability to discharge any of your debts. This goes back to the “honest but unfortunate” phrase in the Supreme Court case quoted above. In order to receive the benefits of bankruptcy, you must be honest in how you proceed through it.
The following kinds of dishonesty could result in not being able to discharge your debts:
Hiding or destroying assets during the year before filing bankruptcy
Hiding or destroying assets after the bankruptcy case is filed
Hiding, destroying, falsifying, or failing to keep records about your financial condition
Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
Making a false oath
Most of the time, you’ll be able to discharge all the debts you expect to discharge. Furthermore, your right to an overall discharge of debts will very likely not be challenged. But if you have ANY reason for doubt about these, be sure to tell your bankruptcy lawyer. And do so right away, preferably early in your first meeting.