What does “discharge” mean?
 Individual DR is freed from legal obligation to pay pre-
bankruptcy debts
 So, the Dr can enjoy her future (post-bankruptcy)
earnings free from the claims of her discharged
creditors
history
 Original 1543 law – no discharge – solely a creditors’
remedy
 Discharge introduced 1706 Statute of Anne
 Still designed to aid CRs – induce Dr to cooperate
 And if did not got death penalty
 CRs had to vote to allow Dr discharge
 Remember bankruptcy purely involuntary, so Dr could
not just file and get discharge
 Enforce: “certificate of conformity,” affirmative defense
History in America
 1800:
 Followed English law
 Involuntary, only against merchants, CRs vote
 1841:
 Watershed
 Voluntary bankruptcy
 Any person whatsoever owing debts
 Today: generous discharge for individuals debtors, but limit
eligibility for chapter 7 relief (means test)
Local Loan
 Facts:
 Individual (Hunt) borrowed $300 from Local Loan Co.,
executed assignment of future wages as security
 Under Illinois state law, wage assignment created lien
effective immediately, attaching to wages as earned, and
not disturbed by a discharge in bankruptcy
 Hunt filed bankruptcy and discharged Local Loan’s debt
 After bankruptcy, Local Loan brought action in Illinois
state court against Hunt’s employer seeking to enforce
the wage assignment as to post-bankruptcy wages
Local Loan
 Held: creditor’s pre-bankruptcy lien against post-
bankruptcy wages is ineffective and unenforceable
Why not defer to state law?
 1) he Illinois wage assignment created an enforceable
lien under state law, and Illinois courts construed it as
enforceable even after a bankruptcy discharge
 2) In Long v Bullard, SCOTUS held that liens survive
bankruptcy
 3) In Butner, SCOTUS held should defer to state law re
creation & nature of property interests
  so why didn’t SCOTUS in Local Loan defer to the
Illinois law?
Why have a discharge?
 According to Justice Sutherland, why do we have a
discharge?
The quote
 “it
gives to the honest but unfortunate debtor
who surrenders for distribution the property
which he owns at the time of bankruptcy, a
new opportunity in life and a clear field for
future effort, unhampered by the pressure
and discouragement of preëxisting debt”
What does it mean?
 What is Court’s point when it says Dr has “a
new opportunity in life and a clear field for
future effort”?
Public interest
 Justice Sutherland emphasizes it is of public interest,
not just the debtor’s private interest, to give the debtor
a discharge
 WHY?
Fair to creditors?
 Is it fair to private creditors to compel them to finance
indirectly the “public interest” via the discharge of a
debtor’s debts?
 If it’s a public interest, why don’t we impose a tax
burden on all citizens and just have the government
give the insolvent Dr a grubstake to move forward?
Freebie??
 Should the debtor have to do anything to
earn a discharge?
Other justifications
 Apart from the iconic “fresh start” policy, why else
might we, as a policy matter, offer a discharge of debts
to individual debtors?
 Why was the discharge originally offered back in
bonnie old England in 1706?
What if no discharge?
 What would happen if the discharge were
not widely available?
Other countries?
 Why don’t other developed economies have as
generous a discharge policy as does the United States?
Do they not care about “fresh starts”? Are they just
mean?
Any limits on discharge?
 Given the justifications for the discharge, what limits
(if any) should be placed on which debtors can qualify,
or on what conditions must be satisfied in order to
earn a discharge?
Exceptions?
 Even if a discharge is generally available to a debtor, are
there any debts that should NOT be discharged, no
matter what? Why?
 And how do you reconcile the decision to exclude
those debts from the discharge with the justification
that a discharge serves the public interest by giving a
debtor a “fresh start”?
Scope & availability of discharge






1) “Debt” only
2) pre-bankruptcy
3) denial of discharge (727(a))
4) excepted debts (523(a))
5) liens survive
6) reaffirm ok (524(c))
 7) defer in chapter 11 or chapter 13 cases until Dr
completes performance under planAnd Dr who flunks
“abuse” test of 707(b) can only go under 13 or 11
 8) only Dr is discharged – not co-Drs (524(e))
Problem 10.1(a)
 DR owes Cr $8K, and debt is secured by a perfected
security interest in a car worth $6K
  discharge the DR’s personal liability on the $8K
note, but
  do not discharge the security interest (in rem)
 So, unless the bankruptcy trustee has dealt with the
collateral in some way (and remember CR has right to
the $6K collateral value if so), Cr is free to enforce the
security interest against the collateral after bankruptcy
10.1(b)
 May 1: DR, distracted while talking on cell phone,
crashes into Cr’s truck and causes $4K damage
 May 2: Dr files chapter 7; Cr has not reduced claim to
judgment
  discharge the $4k debt
 = “debt” even though not reduced to judgment
 Arose pre-bankruptcy
 At most = negligence, not excepted from discharge
10.1(c)
 Same facts as question b, but DR swears light was
green and accident was Cr’s fault
  not change outcome – still a “debt” and discharge it
 Only possible difference is that trustee might object to
Cr’s proof of claim, and if successful objection, Cr won’t
even get paid anything in the bk distribution (if any)
10.1(d)
 Same except Dr intentionally smashes into Cr’s truck
  not discharge
 Exception – “willful and malicious injury”, 523(a)(6)
 An intentional tort
10.1(e)
 Same facts, except accident occurs on May 3
 Recall Dr filed chapter 7 on May 2
  not discharge
 Arose after the bankruptcy filing, 727(b)
 And recall Dr can’t voluntarily dismiss and refile
10.1(f)
 Dr agrees to reaffirm the debt to Cr
  Not discharge but only if meets all of the requirements
for an enforceable reaffirmation agreement in 524(c)
 Those requirements seek to protect Dr from doing something
stupid – paternalistic (e.g., warnings, independent review, Dr
right to change her mind, formal reqmts, etc)
 Can only reaffirm during the case itself – not before, not after
10.1(g)
 Dr intentionally falsifies his bankruptcy schedules, not
listing a valuable property he owns
  deny discharge entirely under 727(a)
 Not cooperate in the bankruptcy case
 Falsified information re financial condition, (a)(3)
 False oath – fraudulent schedules, (a)(4)
 Concealed property with intent to defraud, (a)(2)
enforcement
 Automatic and self-executing
 Statutory injunction (524(a)) against discharged
creditors trying to collect debts as a personal liability
of DR
 Changed law (in 1970) from old approach of discharge
as affirmative defense
Anti-discrimination provision
 525 prohibits various forms of discrimination against a
Dr solely b/c she has filed bankruptcy
 First, a governmental unit may not discriminate with
respect to the grant of a license, permit, charter,
franchise or the like
or
 discriminate in employment, solely because of the
debtor’s bankruptcy. § 525(a).
Anti-discrimination, cont.
 Second, private employers may not fire an employee or
discriminate in employment solely because of a
debtor’s bankruptcy. § 525(b).
 Note, though, that unlike the governmental
employment anti-discrimination rule in subsection
(a), private employers are not barred from
discriminating in hiring because of bankruptcy
Anti-discrimination, cont.
 Third, a debtor may not be denied a student loan
because of the debtor’s bankruptcy. § 525(c).
Denial of discharge
 727(a) has 11 exclusive grounds for complete denial of
discharge in a chapter 7 case
 Note do not apply directly in a chapter 13 or 11 case
 Some provisions in those chapter are similar

E.g., time bar (1328(f)), personal financial management course
(1328(g))
 Also, some of the “bad acts” in 727(a) might lead to dismissal
or conversion to ch 7 of the 11 or 13, and then no discharge
  Common theme underlying 727(a): DR did not
cooperate in the bankruptcy case
Only for humans
 Only individual debtors get discharge.
 § 727(a)(1).
 neither a corporate nor a partnership debtor may
receive a chapter 7 discharge
 but they are discharged by confirmation of a plan in
chapter 11
 Non-human entities do not need a “fresh start”!
Actual fraudulent transfer
 Dr, acting with actual fraudulent intent, transfers or
conceals his property
 Not apply if only constructive fraud
 Time: within one year of bankruptcy
 Or, does so as to property of the estate after the filing
 Note does not go back 2 years, as does the avoiding
power for FT in 548(a)
§ 727(a)(2)
Bad books
 Unjustified failure to keep proper books and records. §
727(a)(3).
 Creditors and the trustee need to be able to figure out
what happened to the debtor financially – so if DR’s
books are hopeless, not get a discharge
 Exception -- even DR did not maintain adequate
records, she still may be discharged if failure was
“justified”
Bankruptcy crime
 Commission of a bankruptcy crime. § 727(a)(4).
 Most common example – DR knowingly and
fraudulently filed false schedules in the bankruptcy
case
What in the heck happened??
 Failure to explain satisfactorily any loss of assets.
 § 727(a)(5).
Disobey court order
 Refusal to obey a lawful court order or to testify
 § 727(a)(6)
 Exception: take the 5th – Dr may invoke Fifth
Amendment privilege against self-incrimination and
refuse to testify and still get discharge
 Change in law in 1978 – under prior Act, Dr had to
choose
Insider
 Commission of a prohibited act (i.e., any of # 2-6) in
the prior year in the bankruptcy of an insider
 § 727(a)(7)
Time limit: ch 7 then another 7
 Time period between discharges: DR may receive a
chapter 7 discharge only once every eight years.
 § 727(a)(8).
 time bar was extended from 6 to 8 six years by BAPCPA
 How count? The eight-year period is computed from
petition filing to petition filing (not from when
discharge entered)
Time limits: 13 then 7
 If Dr’s first case was under chapter 12 or chapter 13, and the
second case is under chapter 7, do not have an 8-year bar
(that is only for a 7 followed by a 7)
 § 727(a)(9).
 Instead, when is 13->7, have conditional six-year bar in
the chapter 7.
 Condition -- EITHER:

(i) payout on unsecured claims in the original chapter 12 or

13 case was 100% or,
(ii) payout at least 70%, the plan was proposed in good
faith, and was the debtor’s best effort.
Time limit:
nd
2
case a ch 13
 BAPCPA instituted for 1st time a time bar when the second
case is chapter 13
 § 1328(f)
 Previously, there was no time bar for a case under any chapter
except chapter 7
 Rule: if 2nd case is a chapter 13, discharge is denied – EVEN
IF DR MAKES ALL PAYMENTS (!) - if DR got discharge:
 (i) in a prior chapter 7, 11, or 12 case filed within four years
before the current chapter 13 case, or
 (ii) in a prior chapter 13 case filed within two years before the
current chapter 13
* this just shows the meanness of BAPCPA!
Waiver
 Waiver: Dr waives discharge
 in writing and
 after the filing of the bankruptcy case
 § 727(a)(10)
 Crucial that DR may not waive the discharge in
advance of bankruptcy
 prevents creditors from obtaining enforceable
boilerplate discharge waivers at the time credit is
extended
DR education
 Failure to complete debtor education
 BAPCPA added provision denying discharge to DR who
fails to complete an instructional course concerning
personal financial management after filing the petition
 Applicable in both chapter 7 and chapter 13 cases

§ 727(a)(11); § 1328(g).
 This post-filing debtor education rule is in addition to the
debtor eligibility rule of § 109(h), which requires a debtor
to receive credit counseling within 180 days prior to filing a
petition in order to be eligible for bankruptcy relief
The Enron rule – delay discharge
 BAPCPA added § 522(q), a $136,875 cap, to the homestead exemption in
certain limited circumstances (is often called the “Enron rule”) if:
 DR is convicted of felony which demonstrates that filing of
bankruptcy was abuse, or
 DR owes a debt arising from securities law violation,
racketeering, fiduciary fraud, or crimes or intentional or reckless
torts that caused death or personal injury in past 5 years.
 Discharge implications:
 court must delay entry of discharge if it finds reasonable
cause to believe that a proceeding under § 522(q)(1) is pending

Applies in all chapters: chapter 7 (§727(a)(12)), chapter 11 (§
1141(d)(5)(C)), chapter 12 (§ 1228(f)), and chapter 13 (§ 1328(h)).
 Rule does not effect permanent denial of discharge -- only postpones
the discharge until the § 522(q) proceeding is completed.
Problem 10.2
 Facts:
 Three months before filing chapter 7, DR made a fraudulent
transfer of his ranch, Blackacre, to his son
 One month before filing, DR consulted an attorney for first
time, and the attorney advised DR that the fraudulent
transfer would defeat his discharge
 Acting on attorney’s advice, DR persuaded his son to reconvey
Blackacre back to DR
 Two weeks after reconveyance, DR filed chapter 7
 DR listed the transfers of Blackacre to and from his son on his
statement of financial affairs and listed Blackacre as an asset
on his schedules
 Trustee objected to DR’s discharge under § 727(a)(2)
Analysis of 10.2
 Question -- can a DR “unwind” a FT and still receive
his discharge?
 Arguments for discharge?
 Arguments against discharge?
Problem 10.3(a)




DR filed chapter 7 on May 1, 1998
discharged on August 1, 1998
May 15, 2006, DR filed a second chapter 7 case
His discharge hearing is scheduled for July 31, 2006.
 May Debtor be discharged?
Answer: DISCHARGE
 8-year time bar computed from filing to filing – so
here, 8 years and 14 days, so ok
* not matter when gets discharges
Problem 10.3(b)
 DR filed chapter 7 on May 1, 2002
 Discharged on August 1, 2002
 April 30, 2006, Debtor filed chapter 13.
 Will Debtor be able to discharge his debts in the
subsequent chapter 13 case?
 Answer: NO DISCHARGE
 DR runs afoul of the new 4-year bar in chapter 13 cases
 DR received discharge in prior ch. 7 case that was filed within
4 years before filing of current chapter 13 case. § 1328(f)(1)

Should have waited two days!
10.3(b), cont.
 What if the first case had been filed under chapter 13
instead of chapter 7?
 Answer: DISCHARGE
 DR would receive discharge in ch 13 if first case is also a
chapter 13. In that event, time bar is only two years, not
four. § 1328(f)(2).
Problem 10.3(c)
 DR borrowed $5K from CR
 Loan agreement provided: DR “hereby waives the right to
receive a discharge under the Bankruptcy Code.”
 Two years later, DR filed chapter 7.
 Will the waiver preclude Debtor from receiving a
discharge?
 Answer: DISCHARGE.
 Pre-bankruptcy waiver of right to receive bankruptcy
discharge is invalid and unenforceable.
 §§ 524(a)(1)-(2), 727(a)(10)
Problem 10.3(d)
 DR incorporated his internet floral business as
“Flowers.com Inc”
 Two years later, Flowers.com Inc. filed chapter 7
 Will it receive a discharge?
 Answer: NO DISCHARGE
 § 727(a)(1) limits chapter 7 discharge to individual
debtors.
Functional discharge, though
 Since all of a corporate debtor’s assets are liquidated in
chapter 7, though, creditors have no further recourse
against the debtor postbankruptcy
 This is the functional equivalent of receiving a
discharge
 Corporate debtors essentially die in chapter 7
Cox
 The case of the bullying husband –
 or the “hear no evil, see no evil, speak no evil” wife?
Facts in Cox
 Stephen & Deborah Cox were married, she quit work and stayed
home when 1st child born
 Husband involved in myriad business activities, including
diamond and bullion trading & real estate
 Wife signed numerous documents
 Became co-owner of 14 parcels real estate, partner in 2 partnerships,
officer or director in 4 corporations
 Never asked Hubby any questions, or discussed business
 She did not keep any records of her own

He came home one day and said they had to flee angry Crs

She eventually turned herself into the FBI

Hubby became a fugitive
Ground for discharge denial?
 Trustee in Deborah’s bankruptcy case objected to her
discharge – inadequate books & records
 727(a)(3):
“the debtor has ... failed to keep or preserve any
recorded information, including books, documents, and
papers, from which the debtor's financial condition or
business transactions might be ascertained, unless
such ... failure to act was justified under all the
circumstances of the case”
Step 1: adequate books?
 1st step under 727(a)(3) – does the DR have adequate
books and records from which her financial condition
can be ascertained?
 Trustee objecting to discharge has B/P
 Earlier decision – records not adequate
Step2 – failure justified?
 If trustee carries B/P that DR does not have adequate
books, burden shifts to DR to prove justification
 Issue in case – was Deborah justified in relying on her
husband to keep the books and records?
Factors in justification
 Six factors :
 (1) Ms. Cox's intelligence and educational background
 (2) her experience in business matters
 (3) the extent of her involvement in the businesses for
which discharge is sought
 (4) her reliance on [her husband] to keep records,
including what, if anything, Ms. Cox saw or was told that
indicated her husband was keeping records
 (5) the nature of the marital relationship
 (6) any recordkeeping or inquiry duties imposed upon
Ms. Cox by state law
Held was justified
 Court held that Deborah Cox was justified in relying
on her husband to keep adequate books and records
 WHY?
Subjective or objective?
 Did court apply a subjective or an objective test of
justification – or perhaps a little of both?
Narrow or liberal construction?
 Did the court construe 727(a)(3) narrowly or liberally?
 Why?
What arguments not justified?
 What arguments would you make that her reliance on
the hubby was not justified?
 Recalling that question is whether she should be
entitled to receive a bankruptcy discharge even though
there were not adequate records by which the trustee or
creditors could figure out her financial and business
affairs
 Should a spouse have a duty of inquiry?
I relied on my accountant …
 Would the rationale of Cox allow a DR to obtain a
discharge notwithstanding inadequate books &
records if she could show that she relied on an
accountant to do the heavy financial lifting?
 Any limits?
Tripp
 “So, tell me about the pot again”
Tripp
 Facts:
 George and Rose Tripp filed chapter 7 November 6
 In their schedules, did not list “marijuana” as “property”
 December 22 – George stopped by police, had ¼ oz pot
 Search warrant – found 14-15 pounds at his home
 Had been growing for 2-3 years
 Sentenced to 5 years in prison
 Bankruptcy trustee objected to discharge under
727(a)(2) (concealment of property) and (4) (false
schedules)
Defense? Not material
 There was no dispute that the Drs knowingly had not
listed the marijuana on their bankruptcy schedules, so
at 1st blush, it would appear that they had both
fraudulently concealed property (thus (2) met) and
had falsified their schedules (thus (4) met)
 What was their defense, then?
 Argued that their omission was not material – since
it had no value to trustee – illegal to sell it!
Court held was material
 Court concluded that the debtors’ omission to list their
marijuana was material
 1st – what was the TEST of materiality?
 2nd – why didn’t the “no value” defense work?
 Would the outcome have been different if Iowa did not
impose a drug dealer tax?
Intent?
 Did the debtors have the necessary fraudulent intent?
 What is the test?
Double jeopardy?
 Why weren’t the debtors protected from denial of
discharge for nondisclosure of the marijuana under
the constitutional protection against double jeopardy?
5 years prison
no discharge
Take the
th
5 ?
 Could the Tripps have argued that they had a 5th
Amendment right not to incriminate themselves that
would excuse them from listing the marijuana?