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A Bankruptcy Discharge Order is a Powerful Tool in Civil Litigation

Thomas W. Hartmann, The Hartmann Law Firm LLC TheHartmannLawFirm.com; Tom.Hartmann@gmail.com; 908 769 6888

If you face civil litigation and have had a prior bankruptcy that might have covered the matter now in litigation, be absolutely sure you advise your attorney immediately. A bankruptcy discharge order is a clear cut, absolute, and extremely powerful tool in civil litigation. This is particularly true in a Chapter 7 no-asset bankruptcy.

When a person receives an Order of Discharge in a Chapter 7 no-asset bankruptcy case, that Order automatically discharges all claims of any party that existed prior to date of the Order and creates an injunction against future claimants under 11 U.S.C. 524(a), with limited exceptions. Under 11 U.S.C. 727(b) of the Bankruptcy Code, the scope of the discharge is as follows: "Except as provided in Section 523 of this title, a discharge under subsection (a) of this section discharged the debtor from all debts that arose before the date of the order for relief under this chapter."

The limited exceptions to discharge arise under 11 U.S.C. 523(a)(2), (4), and (6) and involve fraud, fraud or defalcation while acting as a fiduciary, embezzlement, larceny or willful and malicious injury.

Sometimes, a bankruptcy filer fails to remember a claim and does not specifically list (or schedule) it with the bankruptcy court in connection with the discharge of debts. In some cases, the holders of such claims later sue - not in bankruptcy court but in the civil courts of the state or federal system. Still, the bankruptcy court system becomes involved as the purpose of the bankruptcy was to wipe the slate clean for the debtor as much as possible.

When a new lawsuit is brought on a claim that should have been covered by the bankruptcy Discharge Order, some courts say that since this was a no-asset case, there is no need to re-open the bankruptcy case - that the claim is discharged even if it was not listed or "scheduled." Other courts allow the bankruptcy debtor to re-open the bankruptcy case, schedule the debt or claim, and then have it formally discharged.

Normally, this is handled by notifying the bankruptcy court and the non-bankruptcy court and getting direction from the bankruptcy court. Indeed, the bankruptcy court would also typically review pre-bankruptcy claims such as fraud, embezzlement, willful misconduct or larceny to determine if they are valid claims or if they are covered by the Discharge Order.

However, in New Jersey there is limited case law that allows the non-bankruptcy court to take up these bankruptcy issues. In Re Strano, 248 B.R. 493 (Bankr. D.N.J. 2000); Foley, Inc. v. Fevco, Inc., 879 A.2d 1242, 379 N.J. Super. 574 (N.J. Super. 2005). Under these cases, non-bankruptcy courts can retain jurisdiction to rule on bankruptcy issues after engaging in an extended balancing test involving expertise, time since the bankruptcy, whether issues of state or federal law predominate, whether the issues of law are well settled, and whether all issues are related to matters involving the bankruptcy, among others.

The key point is to be absolutely sure that if you are involved in litigation and had a prior bankruptcy, you advise your counsel. This will allow your bankruptcy and civil litigation attorneys to develop the best strategy to protect you and allow you to retain the benefits of the bankruptcy Discharge Order - whose truest purpose was and is to give you a fresh start.

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