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To what extent does the bankruptcy process relieve a debtor’s debts?
Discharge in bankruptcy is a court order that absolves or exonerates a debtor form the payment of debt obligation. When a debtor is released from debts and discharged of all personal liabilities, it is called discharge in bankruptcy. Once a debtor receives a discharge in bankruptcy, debts covered in the bankruptcy estate are extinguished. This means that the creditor has no right to collect a debt or seek payment for outstanding obligations.
An individual debtor can get a discharge in bankruptcy judgment after filing Chapter 7, 11, 12 and 13. A discharge in bankruptcy is issued after specific requirements have been met and court procedures followed. If there is no objection to the filing, a debtor can automatically receive a discharge in bankruptcy. Once a debtor is discharged, the clerk of the bankruptcy court will notify all creditors, trustees and attorneys of the discharge via mail.
In a Chapter 11 business bankruptcy, unless otherwise stated, confirmation of the debtor in possession’s (DIP’s) plan of reorganization discharges the debtor from any debt that arose before the date of the plan’s final confirmation. The plan will specifically identify any post-petition debts that are not a part of the bankruptcy estate. If a creditor with a pre-petition debt fails to file a proof of claim, its debt will also be discharged as part of the bankruptcy process. Due process rights limit the ability of the court to discharge debts of claimants who did not receive notice of the bankruptcy filing. Unless otherwise indicated in the plan, confirmation vests all of the property of the estate in the debtor free and clear of all liens and encumbrances. Following plan confirmation, the debtor is in complete control of the business and able to continue operations.
• Note: In Chapter 11 reorganizations, a debtor is not required to submit a proof of claim. As such, failure to file the proof of claim will not result in discharge of the claim against the debtor.
• Discussion: How do you feel about the ability of bankruptcy court to discharge debts of the debtor that were not presented as claims to the trustee? Is it fair to require the creditors to file a proof of claim in order to preserve their creditor status? Why do you think this rule does not apply in Chapter 11 reorganizations?
• Practice Question: ABC Corp files for bankruptcy. It initially puts in a petition for Chapter 11, but later converts the filing to a Chapter 7 liquidation. ABC notified all creditors of the Chapter 11 filing, but failed to notify 123 Corp of the Chapter 7 filing. If 123 Corp fails to submit a proof of claim to the bankruptcy trustee, how will this affect 123’s rights?