A Theory of Discharge in Consumer Bankruptcy

Abstract

The purpose of the consumer bankruptcy system, effectuated by discharge, is to give a fresh start to the "honest but unfortunate debtor."'Passage of a bankruptcy statute 2 permitting discharge 3 demonstrates Congress' policy determination that a "fresh start" is important enough to merit discharge of some debts and for some debtors.That we should have some system of discharge in bankruptcy is a settled question.4 The appropriate scope of the "fresh start" and thus of the discharge that implements it, however, is far from settled.Discharge of legal obligations is an extraordinary exception to the usual obligation orientation of the law and it must have * Associate Professor, Vanderbilt University School of Law.I.The usual citation for this proposition is Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934), but the proposition did not originate with that case.Local Loan cited Williams v.U.S. Fidelity Co., 236 U.S. 549, 554-55 (1915), which in turn relied on Wetmore v. Markoe, 196 U.S. 68, 77 (1904).In the course of holding that unpaid alimony was not a provable debt and thus was not discharged in bankruptcy, the Wetmore Court stated: "Systems of bankruptcy are designed to relieve the honest debtor from the weight of indebtedness which has become oppressive and to permit him to have a fresh start in business or commercial life, freed from the obligation and responsibilities which may have resulted from business misfortunes."Id. at 77.A similar statement appeared as early as 1877 in Neal v. Clark, 95 U.S. 704, 709 (1877) (Bankruptcy is "a general law by which the honest citizen may be relieved from the burden of hopeless insolvency.").2. The bankruptcy law currently in effect is the Bankruptcy Reform Act of 1978, Pub.L. No. 85-598, 92 Stat.2549, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat.333, and by the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554, 100 Stat.3088 (codified at 11 U.S.C.A. and in scattered sections of other titles) (West Supp.1985).The current statute will be referred to as the "Code" and cited as "Bankruptcy Code § __ ."The prior statute will be referred to as the "Act" and cited as "Bankruptcy Act § __ ."3. Discharge in Chapter 7 is governed primarily by § § 523 and 727 of the Code.Section 523 lists debts that are excepted from discharge, including obligations for taxes, child support and educational loans, and obligations incurred by the debtor's willful and malicious injury of another or use of a false financial statement to obtain credit.Section 727 lists reasons why discharge will be totally denied, almost all of them relating to misconduct by the debtor in the bankruptcy proceeding.Discharge under Chapter 13, which is governed primarily by § 1328, is more generous in most cases than the Chapter 7 discharge.For a discussion of this issue, see infta text accompanying notes 219-34.Other sections are an integral part of the "fresh start."Exemptions, governed by Bankruptcy Code § 522, provide the debtor a minimum bundle of assets that are protected from the reach of creditors.Subsections (c) and (d) of § 524 place restrictions on the debtor's power to reaffirm discharged debts and is intended to protect the debtor from sinking back under the weight of debts from which discharge has removed him.Redemption under § 722 is available to a Chapter 7 debtor who wants to prevent repossession of exempt property subject to a lien that passed through bankruptcy.Finally, § § 524 and 525, respectively, define the effect of discharge and protect the debtor from certain types of discrimination.4. Some form of discharge has been part of every American bankruptcy statute, although its generosity has varied considerably.The first bankruptcy legislation, passed in 1800, permitted only involuntary petitions against, primarily, traders; it conditioned discharge on the consent of two-thirds of the creditors in number and value.Bankruptcy Act of 1800, ch.19, § 36, 2 Stat.31.The second statute, which was passed in 1841 and endured only 18 months, permitted voluntary petitions and allowed discharge unless a majority of creditors in number and value objected in writing.Bankruptcy Act of 1841, ch. 9, § 4, 5 Stat.443.The third act was passed in 1867.Until its amendment in 1874, it granted discharge only upon the consent of a majority of creditors in number and value unless the estate paid at least 50% of claims.Bankruptcy Act of 1867, ch.176, § 33, 14 Stat.533.The 1874 amendment eliminated the requirement of creditor consent for involuntary cases, and, in voluntary cases, reduced the percentage of claims required to be paid and the number and value of creditors needed for discharge.Act of June 22, 1874, ch.390, § 9, 18 Stat.178.The fourth statute, passed in 1898 and much amended until its replacement by the Code, allowed discharge without creditor consent or a minimum payment on claims.Bankruptcy Act of 1898, ch.

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