Revocation of a Bankruptcy Discharge

If a bankruptcy case is successfully completed, the bankruptcy court grants the debtor a discharge, which gives the debtor a fresh start by relieving him or her of personal liability for most types of debt. However, the U.S. Bankruptcy Code provides a process for requesting revocation of a bankruptcy discharge in specific circumstances and for a limited time.

If a discharge is revoked by the bankruptcy court, all debts are reinstated. The discharge no longer has any effect at all. The debtor could face other consequences as well.

Reasons That Support Revocation of a Discharge

The reasons that support a revocation of discharge differ for Chapter 7 and Chapter 13 bankruptcy.

For Chapter 7 bankruptcy, the trustee or a creditor can request revocation if the debtor:

• Committed fraud in obtaining the discharge, and the fraud was not discovered until after grant of the discharge;
• Knowingly and fraudulently hid or did not disclose or deliver assets that were property of the bankruptcy estate;
• Did not comply with a court order; or
• Made a material misstatement or failed to turn over all necessary documents in a bankruptcy audit, if the debtor cannot provide a satisfactory explanation.

For Chapter 13 bankruptcy, the trustee or a creditor can file a revocation petition if:

• The debtor committed fraud in obtaining the discharge, and
• The petitioner did not become aware of the fraud until after the discharge was granted.

There are many different circumstances that can constitute the type of fraud that will support a petition for revocation of a discharge. In all cases, the bankruptcy court’s determination of whether to revoke the discharge will be based on the evidence in the case.

A petition to revoke a discharge is an adversary proceeding in which both parties will be permitted to produce testimony and documentary evidence at a hearing. Since the case will be decided based on the evidence presented at the hearing, it is always the best interest of both parties to be represented by legal counsel experienced in bankruptcy litigation.

If a discharge is revoked, debts are reinstated as if the bankruptcy case had never occurred. The situation is actually even worse than if the bankruptcy was never filed: The bankruptcy trustee still administers the debtor's assets. Those assets cannot be used by the debtor to pay for a defense or settle claims. The debtor loses non-exempt property, which is liquidated to pay creditors. The debtor is still responsible for paying any unpaid debts. Creditors can pursue state law claims to collect those unpaid claims. For all these reasons, losing a discharge case — which means having a discharge revoked — is sometimes described as "bankruptcy hell."

Filing a Petition to Revoke a Discharge

Only an interested party can file a revocation petition with the bankruptcy court. That means the petition can be filed by the bankruptcy trustee, a creditor, or the United States Trustee.

There are time limits within which a revocation petition must be filed. For a Chapter 7 bankruptcy, the petition must be filed within a year after the discharge is granted or the case is closed, whichever is later. For a Chapter 13 bankruptcy, a revocation petition must be filed within a year after the discharge is granted.

Case Study: Revocation of a Bankruptcy Discharge for Failure to Turn Over Tax Refund

A case upheld on appeal by the United States Court of Appeals for the Eighth Circuit provides an excellent example of a case involving revocation of a bankruptcy discharge. In that case, the debtor’s discharge was revoked because he did not turn over to the trustee a non-exempt tax refund of $1,556.11.

In reviewing the case, the Bankruptcy Appellate Panel for the Eighth Circuit reiterated the Bankruptcy Code provision relating to failure to turn over assets of the bankruptcy estate. That provision requires the failure to be done both knowingly and fraudulently. First, the court reviewed the evidence in the case and determined that the failure was done knowingly based on the facts in the record.

In addressing the question of whether the failure to deliver was also fraudulent, the court relied on standards from a prior case stating that fraudulent intent can be established in many different ways, including:

• Showing that the debtor knowingly made an omission that misled the trustee or engaged in a fraudulent course of conduct;
• Inferring intent from all the surrounding circumstances, so that the debtor’s own pattern of conduct supports a finding of fraudulent intent;
• Showing that the debtor acted so recklessly that fraudulent intent can be implied.

In the case involving the tax refund, the court considered all the circumstances and determined that the debtor’s conduct was so reckless that fraudulent intent could be implied. That finding was based on evidence that the debtor knew he had to turn over tax returns to the trustee and contact the trustee’s office before spending any refund and that he knew those obligations continued after the discharge.

This case is just one specific situation where the debtor’s conduct that led to revocation of a bankruptcy discharge, but it is an excellent example of what can happen if a debtor attempts to hide or withhold property that belongs to the bankrupt estate. In any bankruptcy proceeding where dishonesty or fraud by the debtor occurs, even if it is not discovered until after the discharge is granted, the possibility of a revocation proceeding after discharge exists.

Talk With an Experienced Twin Cities Bankruptcy Litigation Attorney About Revocation of a Bankruptcy Discharge

In any petition for revocation of a bankruptcy discharge, both parties should be represented by legal counsel experienced in bankruptcy adversary proceedings. Alleging and demonstrating a case for revocation or defending against a revocation petition requires bankruptcy litigation experience, skill, and knowledge.

Bankruptcy litigation is a significant part of my practice at the Dave Burns Law Office. I represent both debtors and creditors in adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul. I have years of experience regularly litigating claims by creditors and trustees in bankruptcy adversary proceedings.

If you are facing a situation involving possible revocation of a bankruptcy discharge or another bankruptcy adversary proceeding, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul.