Friday, December 16, 2011

Waiver of Bankruptcy Discharge is Unenforceable

       Recently I was talking to one of our client's creditors on the phone about our client's case. Our client had filed bankruptcy in Nashville. The creditor was trying to explain to me that their debt was not to be included in the bankruptcy because they have their borrower's check a box on the loan application that states that the borrower waives their right to include the debt in bankruptcy and that the debt would be non-dischargeable. I quickly reassured this creditor that such contract provisions are prohibited by the Bankruptcy Code and 6th Circuit case law.

       There are only two avenues which allow a debtor to waive a debt's discharge in bankruptcy. The first is through a reaffirmation agreement through §524. A reaffirmation agreement is a post-petition contract entered into by the debtor and creditor wherein a debtor will reaffirm the debt and waives its discharge in the bankruptcy. The reaffirmation agreement, however, is only valid after being approved by the bankruptcy court judge and meeting other strict conditions.

       The second way a debt passes through discharge is through §727(a)(10), which states that the court shall grant a discharge of the debtor's debts unless “the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter.” This waiver of discharge is unilateral and does not need to be agreed upon by the creditor, however, it still requires court approval.

        These two methods of waiving discharge have two things in common: (1) both require court approval and, (2) both must be entered into post-petition.

        The 6th Circuit Court of Appeals in 2005 interpreted these two provisions to conclude that any prepetition agreements which waive the discharge of a debt contradict the Bankruptcy code and are void because they offend the public policy of promoting a fresh start for individual debtors. Lichtenstein v. Barbanel, 161 Fed. Appx. 461 (6th Cir. 2005). Therefore, in order for any waiver of discharge to be valid it must be through either §524 or §727 and cannot be merely waived by the checking of a box on a loan agreement.  

       Please remember that a debtor who enters into a loan agreement with no intention of paying the money back, but to file bankruptcy instead, can be prosecuted for fraud.

       It must also be noted that a prepetition stipulation can waive the discharge of certain debts, but that is a totally different animal than contractual waiver agreements. For an in depth discussion of this topic please see Line Drawing and the Bankruptcy Discharge: Why Prepetition Stipulations Are Enforceable but Prepetition Waivers Are Not by Kristin Ballobin.


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