Bankruptcy is a federal court process that lets individuals and businesses either get rid of debts or repay debts according to a payment plan.

The person or business that has filed a bankruptcy case is called the debtor. A creditor is any person or business owed a debt on the date the bankruptcy case was filed.

Chapter 7

Chapter 7 is one type of bankruptcy. It normally governs liquidation, a form of debt relief granted under bankruptcy laws. It involves taking control of the property of the debtor, selling the property and distributing the money to creditors. If the debtor is an individual, the process ends in discharge of the debts.

Exemptions

Exemptions are specific kinds of property beyond the reach of unsecured creditors or the bankruptcy trustee. Exempt property isn't available to pay the claims of creditors.

Discharge

A discharge lets you begin a new financial life. When discharge is granted you're no longer responsible for the payment of debts. The discharge also prevents creditors from continuing attempts to collect any discharged debts.

In the typical chapter 7 case, the court gives a discharge early in the case. Generally, even before any money is paid to creditors. The discharge gets rid of all of the debtor's debts unless they are exceptions.

Any of the debtor's property that isn't exempt property is converted to money by the trustee and paid to creditors. If there is little or no property, creditors may receive nothing. The court will give a discharge order, unless the debtor hasn't filed a certificate showing that the debtor attended a required personal financial management course or there are objections to the discharge.

Objections to Discharge

Sometimes the trustee or a creditor will object to the debtor's discharge claiming the debtor committed certain dishonest acts. If the court finds the objections valid, the debtor can be denied a discharge of all of his debts. Some of the more frequently used objection grounds are:

  • Fraudulent transfer or concealment of property - moving money to hide it from the trustee
  • Failure to keep or preserve books or records
  • False oath or account - providing false information about property or money available to pay back creditors
  • Failure to explain loss of assets or insolvency

Fraudulent Transfer or Concealment of Property

Fraudulent transfer or concealment of property can result in a denial of discharge. A trustee or creditor claiming the debtor committed a fraudulent transfer or concealment of property must show:

  • It was done within the one year before the date of the filing of the petition
  • It was done with actual intent to hinder, delay or defraud a creditor or an officer of the estate
  • It was committed either by the debtor or an authorized agent of the debtor
  • It consisted of transferring, removing, destroying or concealing any of the debtor's property, or permitting any of these acts to be done

Time of Objectionable Conduct

Generally, discharge won't be denied a discharge unless it"s shown the act occurred either within one year before the date of the filing of the bankruptcy petition or after the filing of the petition.

Fraudulent Intent

The act must be done with intent to hinder, delay or defraud a creditor or an officer of the estate. A discharge isn't denied if there wasn't intent to defraud. For example, transfers made by debtors in an attempt to keep their business alive and satisfy creditors are not fraudulent. However, sometimes an intent to hinder or delay creditors, even if not fraudulent, may be enough for a denial of discharge.

Evidence of Fraudulent Intent

Although actual intent must be shown, a finding of actual intent may be based on circumstantial evidence or based on conduct. This is because a debtor isn't likely to testify that his intent was fraudulent. Thus a court may look to all the surrounding facts and circumstances. Circumstances that may indicate a fraudulent intent include:

  • A continuing pattern of wrongful behavior
  • The lack or inadequacy of consideration (bargained for benefit or right)
  • The family, friendship or close associate relationship between the parties
  • The retention of possession, benefit or use of the property
  • The transfer of property by the debtor to his spouse while insolvent, but retaining the use and enjoyment of the property
  • The shifting of assets by the debtor to a corporation wholly controlled by him
  • A transfer in anticipation of a pending lawsuit
  • A transfer of all or most of the debtor's property

Debtor's Exemption Rights

You have the right to make conversions to protect exemption rights. Thus, denial of a discharge must be based on evidence of fraudulent intent that goes beyond the conversion of nonexempt to exempt property just before bankruptcy.

Questions for Your Attorney

  • A creditor objected to my bankruptcy discharge based on fraudulent transfer of property. What happens now?
  • The trustee objected to my discharge based on concealment of property that occurred over a year ago. Can that reason be the basis for a denial of discharge?
  • I converted all of my nonexempt property to exempt property just before I filed for chapter 7 bankruptcy. Will I be denied a discharge?