Revoking Debtor’s Discharge

A primary goal in nearly every Chapter 7 case is the bankruptcy court’s discharge order which forever and completely eliminates many of the debtor’s financial burdens. The discharge order is a powerful injunction that stops collection and harassment over the discharged debt. But not every Chapter 7 debtor receives a discharge, a bankruptcy discharge is reserved for the honest debtor. See Grogan v. Garner, 498 U.S. 279 (1991).

Sometimes the dishonest debtor “sneaks through” the system and receives an undeserved discharge. The Bankruptcy Code allows the court to revoke a debtor’s discharge under certain circumstances.

Revoking a Chapter 7 Discharge

Section §727(d) permits a bankruptcy court to revoke a debtor’s discharge after a motion and a hearing. The motion to revoke may be made by either a creditor, the trustee, or the United States Trustee, and must be filed within one year of the discharge being granted (727(d)(1)), or before the case is closed, whichever is later (727(d)(2) and (3)). See 11 USC 727(e). There is no time limit identified in statute or rule for revoking a discharge under Section 727(d)(4). A discharge can be revoked if:

  1. Section 727(d)(1): the discharge was obtained through fraud, and the requesting party was unaware of the fraud prior to the granting of the discharge;
  2. Section 727(d)(2): after the discharge the debtor acquires property of the estate that is not reported or turned over to the trustee;
  3. Section 727(d)(3): if the debtor refuses to obey any lawful order of the court or refuses to testify other than on self-incrimination grounds unless given immunity; or
  4. Section 727(d)(4): the debtor failed to comply with an audit authorized under §586(f), or failed to satisfactorily explain a material misstatement during an audit.

The Ninth Circuit Court of Appeals recently discussed revoking a Chapter 7 debtor’s discharge under Section 727. The debtor, Jerry Jones, failed to list assets in his bankruptcy schedules, then omitted or undervalued assets during his 341 meeting. After Jones’s discharge, the United States Trustee discovered his lies and brought an adversary action to revoke the discharge order. The bankruptcy court found that the omissions were fraudulent, and that the fraud was “sufficient to cause the discharge to be refused if it were known at the time of discharge” under Section 727(a)(4). The bankruptcy court revoked the discharge and the Ninth Circuit Court of Appeals affirmed the decision. See Jones v. U.S. Trustee, NO. 12-35665 (9th Cir., Dec. 2, 2013).

Revoking a Chapter 13 Discharge

The grounds for revocation of a Chapter 13 discharge under Section 1328(e) are narrower than under Section 727(d). A Chapter 13 discharge may be revoked upon request of a party in interest within one year after the discharge is granted if, after a notice and hearing, it is shown that the discharge was obtained by the debtor through fraud, and the requesting party was unaware of the fraud prior to the granting of the discharge. See 11 U.S.C. 1328(e). Note any party in interest can request revocation of a Chapter 13 discharge, while only a creditor, trustee or the United States Trustee can request revocation of a Chapter 7 discharge.

The benefits of a bankruptcy discharge are great, but the risks to the dishonest debtor are