Most people who file for Chapter 7 bankruptcy are able to discharge the vast majority of their debts almost automatically. To prevent discharges from being granted for debts that are legally not subject to discharge or to debtors who don’t deserve them, creditors and other parties in interest have a period of time to file objections. Once an objection is filed, the matter must go before the bankruptcy court for a final decision before a discharge order will be entered.
Chapter 7 is a liquidation bankruptcy. Sometimes you might hear it referred to as straight bankruptcy. When you file for Chapter 7, you turn over any assets that you cannot claim as exempt, or protect from creditors, to the trustee who is overseeing the bankruptcy. Your non-exempt assets, if any, are then liquidated or sold to obtain money to pay your creditors. Creditors receive a one-time distribution of any proceeds and you are generally discharged of any amounts that are not paid. Certain debts, such as spousal or child support, recent taxes and most student loans, are not discharged in bankruptcy. Debts such as credit card and medical bills, and deficiency amounts due on foreclosed mortgages and repossessed vehicles are almost always discharged.
When you first file for bankruptcy under Chapter 7, an automatic stay goes into effect, temporarily prohibiting most creditors from continuing with collection actions against you. A discharge order makes this prohibition, or injunction, permanent for any creditors whose debts are discharged in the bankruptcy proceeding. While creditors are not prohibited from accepting voluntary payments on discharged debts, the discharge does prohibit them from taking any action to collect your pre-bankruptcy debts. The prohibition includes sending you letters or calling to request payment. The effect of the discharge is to extinguish your legal obligation to repay certain debts, making it seem as though they have been wiped out or erased.
Objections to Discharge
An objection to discharge is a serious claim. If it is successful, none of your debts will be discharged. You will likely lose your non-exempt property as the bankruptcy case will proceed normally except that, in the end, you will still owe any debts that are not paid in full from the sale of your assets. The objection itself begins a lawsuit within your bankruptcy. The discharge complaint must set out the basis for the objection and must meet the requirements of the bankruptcy law. Similar to a lawsuit outside the bankruptcy court, you must be served with the complaint and a summons setting forth a deadline to respond, but service by regular mail at the address you listed in your bankruptcy is often sufficient. You can move to dismiss the complaint, challenge the evidence at trial and present your own evidence, just as in a civil trial.
Dishonesty and Misconduct
In most cases, objections to discharge involve claims of dishonesty or misconduct. These can result from your actions prior to bankruptcy, such as operating a ponzi or pyramid scheme, obtaining credit with false information, destroying financial records, or transferring assets with the intent to hinder or delay your creditors. It can also result from actions taken in connection with the bankruptcy filing itself, such as hiding assets by failing to disclose them in your bankruptcy papers, failing to adequately explain a loss of assets or failure to obey a court order. There are administrative reasons why you might not be granted a discharge, such as filing for bankruptcy too soon after receiving a discharge in a prior case or failing to complete the post-filing debtor education requirement, but these generally do not involve the filing of a discharge complaint.