How to Pursue Fraudulent Debtors: Denial and Revocation of Bankruptcy Discharge Under Section 727

What do you do when a debtor owes you money, files for bankruptcy and you know they are fraudulent and hiding money? What happens if you discover the fraud after the debtor receives a discharge? Section 727(a) of the Bankruptcy Code enumerates grounds for denial of discharge, and Section 727(d) provides for the revocation of a granted discharge in the event that the trustee or a creditor discovers debtor misconduct only after a discharge is granted.

Many types of misconduct that are grounds to deny discharge under 727(a) are similarly grounds to revoke a discharge under 727(d). This parallel is intuitive, and in keeping with the Bankruptcy Code’s equitable purpose. “[A] discharge under § 727 is a privilege, not a right, and may only be granted to the honest debtor,” and it follows that the proverbial dishonest debtor should not reap the benefits of an ill-gotten discharge (In re Tylee) However, a discharge, once granted, enjoys a strong presumption of validity, and a creditor seeking to have the court revoke the discharge must meet a greater burden of proof than would a creditor seeking to deny a discharge at the outset. As one bankruptcy court has put it, revocation of discharge “must be considered an extraordinary remedy.”2Section 727(d) provides several grounds for revoking a discharge, and courts have explained that, in light of the policy favoring bankruptcy relief, a party seeking to revoke a discharge can prevail only by strictly meeting the requirements of one of the listed grounds. One crucial, common factor to most of these grounds is fraud. Section 727(d)(1) provides that a discharge should be revoked when the debtor obtained the discharge through fraud which the opposing party did not discover until after the discharge. Section 727(d)(2) provides for revoking discharge when a debtor “fraudulently failed to report the acquisition of or entitlement to…, or to deliver or surrender…to the trustee” property that was or would be property of the bankruptcy estate. Finally, Section 727(d)(3) provides for discharge if the debtor engaged in certain enumerated activities which, had they been discovered earlier, would have resulted in denial of discharge. Among such activities are “knowingly and fraudulently” making a false oath with regard to the case, using a false claim with respect to the case, or withholding information from an authorized individual with respect to the case.

While a creditor or trustee seeking to revoke a discharge typically must prove fraud, fraud is usually difficult to prove. As countless bankruptcy courts have noted, a debtor engaged in fraud will seldom admit to it. Therefore, courts look to circumstantial evidence of fraud, and they generally relax the standard for proving fraud. In one striking example, one court deemed fraudulent a debtor’s failure to disclose an interest in a pending arbitration proceeding against Merrill Lynch because “an individual astute enough to amass $1,000,000 in a Merrill Lynch account would also recognize a potential action against Merrill Lynch for trading losses.”3

Because arguing for the revocation of a discharge is highly fact-sensitive and reliant upon circumstantial evidence, a creditor seeking to challenge a debtor’s bankruptcy discharge is advised to seek an attorney experienced in business and financial legal matters and with a keen eye to detail.

At Smith & Associates, we have extensive experience representing creditors in pursuing fraudulent debtors. In one case, a debtor was hiding property overseas. In another case, a debtor claimed poverty after making off with millions. We relentlessly pursue every case to track down the assets. Even in situations in which most creditors and their attorneys would give up and close their files, we help our clients dig deeper, go further, and get better results.
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1. Section 727 of the Bankruptcy Code is the lynchpin of the Chapter 7 Bankruptcy Proceeding, providing a qualifying debtor with a right to discharge upon completion of the process.
2. In re Weisberg, 202 B.R. 332, 334 (D. N.H. 1996)
3. In re Abdelmassia, Case No. 01-39847 (Bankr. D. N.J. 2001)

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