When Is There a Threat of Refusal to Discharge the Remaining Debt?

When Is There a Threat of Refusal to Discharge the Remaining Debt?

by Ragini Salampure

What is the denial of discharge of residual debt? 

The refusal of the discharge of residual debt is the negative decision of the bankruptcy court on the application made for the discharge of residual debt. Since the discharge of residual debt is the goal of every debtor in insolvency proceedings, it is all the more important to know what behavior is jeopardizing the discharge of residual debt. However, chapter 7 bankruptcy is pretty common in the United States, and there where a bankruptcy attorney may help you coping with your debts.

In the provisions on the discharge of residual debts (§§ 286), the legislature has standardized which obligations – i.e. obligations in the non-technical sense – are required of the debtor in order to become debt-free at the end of the procedure. This creates legal certainty for the debtor as to which expectations are placed on him in order not to be faced with surprising requirements. If the debtor tries to the best of his ability to help his creditors to settle their claims throughout the insolvency proceedings, then there are no grounds for refusal.

The discharge of residual debt will be refused if a creditor or the trustee requests this and a breach of a legal obligation to conduct during the bankruptcy is determined by the bankruptcy court. Please note that the subsequent refusal of the residual debt discharge within six months after it has been granted is also possible at the request of the creditors (Section 297a).

The following post shows you which deadly sins to watch out for.

Mortal sin: Missing or incorrect information 

One of the most important obligations for the debtor is not to provide false or incomplete information about the matter during the entire procedure. The debtor has the duty to provide information, sometimes on request, but sometimes also unsolicited. 

  1. a) For example, when applying for discharge of residual debt, the oblige has to submit a declaration as to whether he has already gone through insolvency proceedings in the past and when this was the case (cf. §§ 287, 287a). This is intended to enable the bankruptcy court to check whether the respective blocking periods are being adhered to in the event of a second bankruptcy or a renewed application for discharge of residual debt. 

Excursus: What are the blocking periods? (Section 287a old version, Art. 103k Paragraph 3 EG)

  • 10 years must have passed between a discharge of residual debt and a renewed application for discharge of residual debt.
  • 5 years must have passed if a residual debt discharge was denied due to an insolvency offense in order to apply for a new residual debt discharge.
  • 3 years must have passed if discharge of residual debt has been denied due to a lack of cooperation, violation of the employment obligation or incorrect or incomplete information. 
  • Please note: In the future, there will be an 11-year blocking period if you have gone through insolvency proceedings based on an application for insolvency submitted on or after October 1, 2020 (Art. 103k Paragraph 3 EG).
  1. b) If the debtor files an application to open insolvency proceedings, he must at the same time make a declaration of the assets he has at his disposal. A list of assets is to be drawn up about this (Section 305 (1) No. 3). This lists what assets are available and what income is being drawn. The debtor must provide the information required for this completely and correctly. If the debtor violates this in a grossly negligent manner, a refusal to discharge the remaining debt is to be expected. 

Mortal sin

Mortal sin: lack of cooperation 

  1. a) Before the bankruptcy court decides on the discharge of the residual debt, the creditors can submit an application for the refusal of the discharge of the residual debt. The creditors have to give specific reasons for this and make them credible to the bankruptcy court. The debtor is then obliged to explain the insolvency court’s question, which is based on the reason for refusal. If the creditors apply for this information to be affirmed in lieu of an oath, the creditor must affirm his information in lieu of an oath. If the debtor does not answer the question of the court or if he does not show up at a date set by the court, discharge of the remaining debt will be denied. The same applies to an affidavit in lieu of an oath (Section 296 (2) sentence 3). 
  2. b) During the insolvency proceedings in the narrower sense, the debtor has strict information obligations. He must disclose all legal and economic circumstances (Section 97 InsO). This even goes so far that even those circumstances are subject to the disclosure obligation, which are suitable to justify an initial suspicion with regard to the commission of a criminal offense. However, this obligation is mitigated to the extent that the information disclosed may not be used in criminal or administrative offense proceedings. 

In the conduct of business period, the information and cooperation obligations are reduced (Section 295). From then on, the debtor has a duty

  • notify a change of residence or employment
  • not to conceal any remunerable money from income or inheritance

to provide information on employment at the request of the bankruptcy court or the trustee.

Mortal sin: Lack of concern for income (employment obligation)

During the entire insolvency proceedings, the debtor has to pursue appropriate and reasonable employment in order to generate an income. If he does not do one, he must make serious efforts to obtain one and must not refuse reasonable employment in the case. This obligation therefore applies both in insolvency proceedings in the narrower sense (Section 287b) and in the subsequent period of good conduct (Section 295). This compulsory action for the debtor is called the obligation to earn a living. 

Mortal sin: bankruptcy or fraudulent activity 

Bankruptcy offense

The discharge of residual debt can also fail if a so-called insolvency crime was committed in the last five years prior to the opening application. Which includes:

  • Section 283 bankruptcy
  • Section 283b of the Criminal Code Violation of the accounting obligation
  • Section 283c of the Criminal Code: preferential treatment for creditors 

All of the criminal offenses listed have in common that you have the protection of creditors in mind. The debtor has to behave economically particularly carefully, especially if he is aware of an impending or actual insolvency. 

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