Bankruptcy Fundamentals: Discharge After Prior Bankruptcy Filings

04 Jan Bankruptcy Fundamentals: Discharge After Prior Bankruptcy Filings

Recently, I had cause to go back to re-visit some of the provisions in the Bankruptcy Code relating to when a discharge is entered. Since this is the start of a New Year, perhaps a review of some basics is in order.

For a chapter 7 case, the operable statute is 11 U.S.C. § 727. Section 727 says that a discharge shall not be granted if a debtor has received a discharge under § 727 in a case commenced within 8 years before the date of the filing of the current bankruptcy case. Seems straightforward enough. If you filed a chapter 7 case 8 years ago, you can’t file another chapter 7 case until those eight years have passed.

Well, not exactly. As most bankruptcy practitioners know, a lot of people will file a chapter 13 case and then, for some reason or another, have to convert their case to a chapter 7. In that instance, do we look at 8 years from the date of filing or 8 years from the date of conversion?

The statute itself supplies the answer–

“in a case commenced within 8 years . . .”

That means that if the debtor files a 13, that is the date the case was commenced and the correct date for calculating when a debtor then becomes eligible for a chapter 7 discharge. So, if a debtor filed a chapter 13 on 2-1-2004 and converted his case to a chapter 7 on 4-1-2004, the debtor would be eligible for another chapter 7 discharge on 2-1-2012.

If a debtor has previously received a chapter 7 discharge and less than 8 years have passed, does that mean the debtor cannot file another chapter 7 case? Not exactly.

Section 109 describes who may be a debtor. There is no provision in § 109 that says a person who had previously been granted a chapter 7 discharge may not file another chapter 7 case even though less than eight years have passed since the prior filing.

These two provisions taken together merely mean that, if a debtor files a chapter 7 case before eight years have passed since his prior filing, he will not get a discharge of his debts.

Admittedly, receiving a discharge of debts is normally the whole purpose of filing for bankruptcy, there may be reasons for choosing this course of action.

As an example, suppose the debtor has assets that he would like to sell in order to pay his creditors. In particular, if the debtor were to be able to sell his assets and it would be enough to pay the creditors in full, the debtor could file a chapter 7 and allow the trustee to sell the assets. All creditors would then be paid in full and the debtor walks away from his troubles. The chapter 7 trustee deals with all the creditors and the burden of liquidating the assets, that is, selling them.

This can happen when there are secured creditors threatening repossession or foreclosure on an asset with sufficient value to satisfy the claims of other creditors but the debtor lacks the cash to stave off the secured creditor’s actions.

The foreclosure/repossession is stopped by the automatic stay and the chapter 7 trustee is there to say to the secured creditor, “whoa buddy! Let’s see if we can’t sell this collateral in a more orderly manner to generate money for all creditors.” Chapter 7 trustees, who also get a commission on assets that they sell, have an incentive to maximize the value of the property to the bankruptcy estate (and themselves).

But, let’s also be clear that this can be a risky maneuver on the part of the debtor. If the claims of the creditors are not satisfied, the debtor may still owe some of the creditors and will not receive a discharge.

Another interesting provision involves the timing of chapter 13 cases.

Under 11 U.S.C. § 1328(f), if the debtor received a discharge under a case filed under chapter 7, he may not get a chapter 13 discharge unless 4 years have passed. If a case was filed under chapter 13 and a discharge entered, the debtor is not eligible for another discharge under chapter 13 for two years.

So, if a bankruptcy case was originally filed under a chapter 13 case and then converted to a chapter 7, which is the correct date? Again, the statute provides the answer. Under either provision, you must determine under which chapter was the prior case filed.

  • If it was filed under a chapter 7, then the debtor must wait four years for a Chapter 13 discharge.
  • If it was originally filed under a chapter 13, the debtor must wait two years.

It does not matter under which provision of the Bankruptcy Code the debtor received his discharge.

So, if you had previously filed a bankruptcy case, it is very important to know under which chapter you filed in addition to knowing under which provision your debts were discharged.

It is very important to you discuss any prior bankruptcy filings with an experienced bankruptcy lawyer so he or she can make sure that you are eligible for a discharge.

 

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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