Bankruptcy is a federal court process that allows individuals and businesses to either eliminate their debts or repay them under a payment plan. The person or business that files for bankruptcy is called the debtor. A creditor is any person or business to whom the debtor owed a debt on the date bankruptcy was filed.

Chapter 7 is one type of bankruptcy that covers the liquidation of a debtor. Liquidation is the collection, selling and distribution of any property that isn't exempt and ends in the discharge of the debtor.

Discharge

A bankruptcy discharge is a court order letting the debtor off the hook for certain debts. The discharge bans creditors from taking any form of collection action on discharged debts. Thus, creditors may not take legal action or even communicate with the debtor.

The court enters an order of discharge shortly after the deadline for filing any objections. The court won't order a discharge if there are any objections or if the debtor hasn't filed a certificate showing the debtor has taken the required personal financial management course.

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 true, the debtor can be denied a discharge of all debts. Some of the more frequently used grounds for objections to a discharge are:

  • Fraudulent transfer or hiding property
  • Failure to keep books or records
  • False oath or false accounts
  • Failure to explain loss of assets or inability to pay debts

Denial of Discharge

The failure to explain a loss of assets or inability to pay debts can result in a denial of discharge. A debtor is denied a discharge when the debtor fails to satisfactorily explain any loss or shortage of assets to meet debts. This includes any unexplained disappearance or shortage of assets.

An objector must do more than just claim the debtor failed to explain losses. Once the objector has introduced some evidence of the disappearance of substantial assets or of unusual transactions, the debtor must satisfactorily explain what happened.

Generally, debtors who have never had substantial assets are not denied a discharge on the ground of lack of financial resources or failure to explain the loss of assets. Also, a debtor doesn't need to explain the loss of his spouse's assets, simply because a joint petition was filed.

Satisfactory Explanation

First an objector must produce evidence to support the objection. Next, the burden of satisfactorily explaining the loss or shortage of assets shifts to the debtor.

A satisfactory explanation means the debtor probably must explain any losses or shortages in such a way as to convince the court of the debtor's honest intentions. A lack of wisdom in the debtor's spending is not grounds for denial of a discharge.

Questions for Your Attorney

  • The trustee has objected to my discharge and claimed that I failed to explain losses--does the trustee need to have some evidence?
  • I don't have many assets - can I be denied a discharge on the ground of failure to explain the loss of assets?
  • A creditor had evidence to back up a claim that I failed to explain losses, what do I need to show the court so I won't be denied a discharge?