How Creditors May Challenge A Debtor’s Right To Entire Discharge | Nicholas Gebelt - California

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Yes, normally challenges to the discharge are challenges to the discharge of a particular debt and that’s done under Section 523 of the Bankruptcy Code. In a Chapter 7, a debtor gets a discharge under Section 727 and Chapter 11 under 1141 and under Chapter 13 under 1328. Now, you can’t get a Chapter 11 discharge if you would be ineligible to get a Chapter 7 discharge. So, that’s why I bring up these non-Chapter 7 sections. So a creditor can certainly challenge the entire discharge. Generally, the creditor is not going to do it if it’s just a fraud against that creditor; that instead will be a 523 action. But if it’s a fraud on the court that there’s a pattern of malfeasance on the part of the debtor that in essence, the debtor scammed the bankruptcy system and scammed the court then the creditor can certainly initiate that kind of an action.
The drawback or the danger here, maybe that’s the better way to put it is that while you can have a 523 action settled because it’s just an action between the debtor and that particular creditor. So you can come up with a settlement agreement, everybody is happy, the judge approves it and off you go. With a 727 action, it’s not so simple because let’s say you decide that we are going to settle and we’ll agree, maybe he’ll just pay me this money and I’ll drop the lawsuit. Well, it’s not so simple. You have to let all the other creditors have a chance to get on board because if it’s a challenge of the entire discharge and you say you want to settle it, , that’s going to affect the creditors who did not participate in that adversary proceedings. So they have to get another bite at the apple. So unless there is something really egregious, if a creditor is going to initiate a non-dischargeability action, it’s generally going to be under Section 523 rather than under Section 727.
In Chapter 11 debts that are non-dischargeable in a Chapter 7 are also non-dischargeable in a Chapter 11, so it would still be the same thing under Section 523 . In Chapter 13, the non-dischargeable debt list is a bit shorter. It does include some of those debts that are listed in Section 523, but there are some that are not listed. I’ve already mentioned that at least one of them or two of them, as a matter of fact in answers to prior questions today. One is the willful and malicious harm to property and the other is a debt to a spouse or former spouse that’s not domestic support and that was incurred during a divorce decree or separation agreement. So, in some yes, the creditor can certainly challenge the entire discharge but that can be dangerous and there really has to be a good reason to do it.
Unfortunately, as with non-bankruptcy litigation, sometimes people are motivated more by anger than they are by legal principle and you see this especially if there is some sort of a divorce proceeding going on that the injured party is going to destroy himself or herself just to get at that ex-spouse just because of bitterness and anger. So when somebody says it’s not really about the money, it’s about the principle, most of the time, it’s just about the money, but occasionally, I’ll have somebody that engages in some really self-destructive behavior just to get at that other person and it’s unfortunate, but we all see that sometimes in bankruptcy, I think it happens less frequently in bankruptcy than it does outside of the bankruptcy system.


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