11 U.S.C. Section 727 - Discharge in Chapter 7

What Is Section 727?

Section 727 governs the discharge available to individual debtors in Chapter 7 cases. Unlike Chapter 13's discharge under Section 1328, which is conditional on completion of plan payments, the Chapter 7 discharge is entered as a matter of course at the conclusion of the case unless a party in interest objects and proves one of the statutory grounds for denial. The discharge releases the debtor from personal liability for most pre-petition debts.

Section 727 applies only to individuals. Corporate and partnership debtors do not receive a discharge in Chapter 7 (Section 727(a)(1)). This is one reason most business reorganizations or liquidations of going concerns proceed under Chapter 11 rather than Chapter 7.

Grounds for Denial: Section 727(a)

Section 727(a) enumerates twelve grounds on which the court "shall" grant the discharge unless an objector establishes one of the following:

1. 727(a)(1): The debtor is not an individual.
2. 727(a)(2): The debtor transferred, removed, destroyed, mutilated, or concealed property with intent to hinder, delay, or defraud a creditor within one year before filing or after filing.
3. 727(a)(3): The debtor concealed, destroyed, mutilated, falsified, or failed to keep or preserve recorded information from which the debtor's financial condition might be ascertained.
4. 727(a)(4): The debtor knowingly and fraudulently made a false oath or account, presented a false claim, gave or received money for acting or forbearing to act, or withheld recorded information.
5. 727(a)(5): The debtor failed to explain satisfactorily any loss of assets or deficiency of assets to meet liabilities.
6. 727(a)(6): The debtor refused to obey a lawful order of the court, refused to testify after invoking and being granted immunity, or refused to answer a material question approved by the court.
7. 727(a)(7): The debtor committed any of the acts described in (a)(2) through (a)(6) on or within one year before filing, in connection with another insider case.
8. 727(a)(8): The debtor received a prior Chapter 7 or Chapter 11 discharge within 8 years before filing.
9. 727(a)(9): The debtor received a prior Chapter 12 or Chapter 13 discharge within 6 years, subject to certain payment thresholds.
10. 727(a)(10): The court approves a written waiver of discharge executed by the debtor after the order for relief.
11. 727(a)(11): The debtor failed to complete an instructional course concerning personal financial management (subject to limited exceptions).
12. 727(a)(12): The debtor is subject to certain pending criminal or civil proceedings under Sections 522(q)(1)(A) or (B).

Procedure for Objecting to Discharge

An objection to discharge is brought by adversary proceeding under Federal Rule of Bankruptcy Procedure 7001(4). Standing to object is conferred on the trustee, a creditor, or the United States Trustee under Section 727(c). The deadline to file is governed by Rule 4004(a): generally 60 days after the first date set for the meeting of creditors under Section 341, with extensions for cause permitted under Rule 4004(b).

The objector bears the burden of proof under Rule 4005. The standard of proof is preponderance of the evidence for most grounds, although fraudulent-intent grounds under (a)(2) and (a)(4) require proof of actual fraudulent intent, often shown through circumstantial badges of fraud.

Revocation of Discharge: Section 727(d)

Even after entry, a discharge may be revoked on four grounds under Section 727(d):

• 727(d)(1): The discharge was obtained through fraud, and the requesting party did not know of the fraud until after the discharge.
• 727(d)(2): The debtor acquired property of the estate or became entitled to acquire such property, knowingly and fraudulently failing to report it or deliver it to the trustee.
• 727(d)(3): The debtor refused to obey a lawful order or to respond to a material question approved by the court, as described in 727(a)(6).
• 727(d)(4): The debtor failed to explain a misstatement discovered in audit, or failed to provide documents required for audit.

A motion to revoke must be filed within strict time limits under Section 727(e): within one year for fraud (d)(1), or within one year of discharge or the date the case is closed (whichever is later) for (d)(2) and (d)(3) grounds.

Effect of the Discharge

A Chapter 7 discharge under Section 727 releases the debtor from personal liability for all pre-petition debts other than those excepted from discharge under Section 523. The discharge is enforced through the permanent injunction of Section 524(a). Valid liens are not extinguished by the discharge and "ride through" the case unless avoided.

The Chapter 7 discharge does not extend to debts incurred after the petition date, debts owed by non-debtor parties (such as co-signers), or debts excepted by Section 523. Whether a particular debt is excepted often requires litigation in an adversary proceeding filed under Rule 7001(6).

Related Bankruptcy Code Sections

This section operates in concert with several other provisions of the Bankruptcy Code:

• Section 523 - Exceptions to discharge
• Section 524 - Discharge injunction
• Section 522 - Exemptions available in Chapter 7
• Section 541 - Property of the estate that the trustee may liquidate
• Section 521 - Debtor duties including the financial-management course

Understanding how these sections interact is important for debtors, creditors, trustees, and counsel navigating a bankruptcy case.