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The Basics: Rule #1 Is to Be Honest in Bankruptcy

August 5, 2013 by Mikel Erdman

Reach the main goal of most bankruptcies—the “discharge” (write-off) of all or most of your debts—by being honest throughout your case. 

 

One of the most familiar passages in bankruptcy law is the following from a 1934 United States Supreme Court opinion, about describing the purpose of bankruptcy:

… 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).

Most People Filing Bankruptcy Get that “New Opportunity in Life”

In most bankruptcy cases, the person filing gets a discharge of his or her debts. In fact the law requires that result, unless the facts show that some exception applies.

The Bankruptcy Code states (at Section 727(a)) that under a Chapter 7 “straight bankruptcy,” the bankruptcy “court shall grant the debtor a discharge,” with only certain narrow exceptions.

The Code also states (at Section 1328(a)) that under a Chapter 13 “adjustment of debts,” the “court shall grant the debtor a discharge of all debts,” again with only certain narrow exceptions.

As long as those exceptions don’t apply to you, your debts will be discharged and you’ll have that “new opportunity in life” that the Supreme Court was referring to.

Two Kinds of Exceptions to Getting a Discharge

There are two kinds of exceptions, those that determine whether you can discharge certain specific debts, and the ones that determine whether you can get a discharge of any of your debts.

You’ve more likely heard more about the first kind, the individual types of debts that can’t be discharged. They can’t be, either because they can never be, such as child support, or because they can only be discharged under certain conditions, such as income taxes.

But the less familiar, second set of exceptions is actually more dangerous because these doesn’t just relate to a specific debt or two, but rather to your ability to receive a discharge of ANY of your debts. These go back to the simple rationale implied in the Supreme Court quote above, that for you to receive the benefits of bankruptcy you must be honest in how you ask go about it.

How to Avoid Not Discharging Any of Your Debts

The following types of dishonesty could result in not being able to discharge your debts. Notice that they pertain to honesty about your property or financial records, with some referring to behavior before filing bankruptcy and some to behavior after filing:

  • Hiding or destroying assets during the year before filing bankruptcy
  • Hiding or destroying assets that are under bankruptcy jurisdiction after the bankruptcy case is filed
  • Hiding, destroying, falsifying, or failing to keep records about the debtor’s financial condition
  • Failing to satisfactorily explain a loss of assets before the filing of bankruptcy
  • Making a false oath

If you have any concerns whatsoever about any of these potentially applying to you, be sure to raise them clearly with your bankruptcy attorney, preferably early in your first meeting. 

Filed Under: Bankruptcy Advice Tagged With: discharge,dismissal,exceptions to discharge,fraud,assets

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