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Consumer Bankruptcy Law and Practice: 15.2.2.5 Failure to Explain Loss or Deficiency of Assets—11 U.S.C. § 727(a)(5)

This provision barring discharge is often grouped with the previous two relating to the debtor’s honesty with regard to the bankruptcy case. Once a creditor carries its burden of establishing that assets have been lost or dissipated, this section places the burden on the debtor to explain the loss or dissipation.68 Courts interpreting this section have been concerned primarily with debtors who previously had large amounts of property or money, a situation that, unfortunately, few consumer clients have ever experienced.

Consumer Bankruptcy Law and Practice: 15.2.2.6 Refusal to Obey Court Orders or to Testify—11 U.S.C. § 727(a)(6)

If the debtor refuses to comply with direct court orders, a discharge may be denied.72 This unusual situation arises most often when a debtor has been ordered to turn over property that they expected to keep in the bankruptcy and that the debtor may no longer even possess. For example, debtors who are poorly advised sometimes spend tax refunds that they receive after filing their cases. When those refunds are not exempt, they constitute property of the estate that the court orders turned over to the trustee.

Consumer Bankruptcy Law and Practice: 15.2.2.7 Commission of Prohibited Acts in Connection with Another Bankruptcy Case Concerning an Insider—11 U.S.C. § 727(a)(7)

Debtors who have committed any of the fraudulent acts listed in the previous sections, 11 U.S.C. § 727(a)(2) to (a)(6), within one year before filing their cases, or after filing their cases, are barred from discharge if the act was committed in connection with another case concerning an “insider.” The Code defines “insider” to include relatives and partners, as well as partnerships and corporations of which the debtor is a director, officer, or person in control.78

Consumer Bankruptcy Law and Practice: 15.2.2.8 Prior Discharge in Chapter 7, Chapter 11, or Their Predecessors—11 U.S.C. § 727(a)(8)

This subsection contains an eight-year bar against successive bankruptcy discharges for debtors who have received prior discharges under chapter 7 or chapter 11. It is important to note, first of all, that it applies only to prior cases in which a discharge was granted. If a prior bankruptcy case was terminated without a discharge, by a dismissal for example, this objection to discharge may not be raised.

Consumer Bankruptcy Law and Practice: 15.2.2.11 Failure to Complete Course in Personal Financial Management—11 U.S.C. § 727(a)(11)

As discussed in an earlier chapter, all individual debtors in chapter 7 and chapter 13 cases, with very limited exceptions, must complete a personal financial management course offered by an approved provider as a prerequisite for receiving a discharge.97 Section 727(a)(11) contains this requirement, although it is unlikely an objection to discharge will be the procedure for implementing it.

Consumer Bankruptcy Law and Practice: 15.2.2.12 Delay of Discharge to Determine Homestead Exemption Rights—11 U.S.C. § 727(a)(12)

As discussed in an earlier chapter,101 section 727(a)(12) provides a mechanism for the court to delay a discharge if there is uncertainty about whether the homestead limitation of section 522(q) applies. Such uncertainty would usually arise because of litigation or a criminal prosecution that has not been completed at the time the discharge order would ordinarily be entered.

Consumer Bankruptcy Law and Practice: 15.4.1 Differences Between Chapter 7 and Chapter 13

Somewhat less serious than an objection to discharge that could prevent a debtor from receiving any discharge at all is the problem of a particular debt that is not covered by the discharge a debtor does receive. When the debtor receives a discharge that is not applicable to all debts, those debts that are excepted from discharge can seriously undermine the benefits a bankruptcy would otherwise provide. The general rule is that a prepetition debt is discharged unless a specific exception to the discharge provides otherwise.118

Consumer Bankruptcy Law and Practice: 15.4.2 How Exceptions to Discharge Are Raised

The Bankruptcy Code makes an important distinction between two categories of exceptions to discharge. The first category consists of debts that are excepted from the discharge regardless of whether the issue is raised during the bankruptcy case. The exceptions falling into this category, each of which is discussed below, are those covered by subsections (a)(1), (a)(3), (a)(5), and (a)(7) to (a)(19) of section 523, as well as subsections (a)(1), (a)(3), and (a)(4) of section 1328.

Consumer Bankruptcy Law and Practice: 15.4.3.1.1 Taxes that cannot be discharged

Taxes are the debts that are most frequently nondischargeable in bankruptcy cases. However, it is important to realize that not all taxes are nondischargeable.161 A rather complicated series of cross-references within the Code162 can be followed to the conclusion that, basically,163 only the types of taxes listed below are not discharged in consumer chapter 7 or chapter 12 cases:

Consumer Bankruptcy Law and Practice: 15.4.3.2.2.1 Overview

Cases based on allegedly false financial statements by consumers have become more rare as consumer lending has shifted away from finance company loans and other document-based transactions. However, such cases have begun to surface in the wake of the mortgage crisis, with debt buyers who have purchased underwater junior mortgages asserting that they were obtained by fraud, often based on little or no evidence and the hope that a pro se or poorly represented debtor will not defend or will quickly settle.

Consumer Bankruptcy Law and Practice: 15.4.3.2.2.2 The debtor obtained money, property, services, or an extension, renewal, or refinancing of credit

The first element that the creditor must allege and prove is that the debtor obtained money, property, services, or an extension, renewal, or refinancing of credit through the use of the allegedly false statement. Thus, if the creditor has given up nothing in the transaction, the exception to discharge is not applicable.226 And the money, property, or extension, renewal, or refinancing of credit must have come from the creditor claiming its debt is nondischargeable.227

Consumer Bankruptcy Law and Practice: 15.4.3.2.2.3 The statement was materially false and in writing

To prevail on the false financial statement prong of section 523(a)(2), as opposed to fraud or false pretenses, a creditor cannot simply prove that a debtor’s financial statement was false. The financial statement must be in writing.245 In addition, the financial statement must be materially false. Credit card lenders should not be successful in nondischargeability actions brought under this prong of section 523(a)(2)(b) if credit card applications are taken over the phone and include allegedly false statements.

Consumer Bankruptcy Law and Practice: 15.4.3.2.2.6 The debtor’s intent to deceive

Finally, the creditor must prove that the debtor had an actual intent to deceive it through the use of the false financial statement.262 If the debtor’s false disclosure was innocently or negligently made, the debt is dischargeable, although some courts have considered a “reckless indifference” to the truth to be equivalent to intentional falsehood.263 Thus, debtors who failed to list debts because they thought a spouse or relative was responsible for paying them have been found to be without in

Consumer Bankruptcy Law and Practice: 15.4.3.2.3.1 Overview

Very similar to cases dealing with false financial statements are complaints challenging dischargeability on the basis of false pretenses, false representations, or actual fraud.271 These complaints are usually based upon information conveyed by the debtor, orally, in writing, or by conduct, but not in a written financial statement.272

Consumer Bankruptcy Law and Practice: 15.4.3.2.3.3 Public benefits overpayments

Another type of fraud problem that may arise in the cases of low-income debtors involves past overpayments of Social Security, unemployment, welfare, or other benefits. In many cases involving such overpayments, the amount that was erroneously paid is deducted from future benefits, often causing considerable hardship.

Consumer Bankruptcy Law and Practice: 15.4.3.2.4 Tactics in cases under 11 U.S.C. § 523(a)(2) and award of attorney fees under 11 U.S.C. § 523(d)

Some creditors file complaints alleging nondischargeability because of a false financial statement, false pretenses, or fraud in hopes that they can obtain a settlement reaffirming all or part of a debt, because some debtors’ attorneys do not defend against such cases. It is important to quickly disabuse a creditor/plaintiff of such notions by making it known that the case will be vigorously defended, quite possibly at the creditor’s expense.