6.7 OBJECTIONS TO DISCHARGEABILITY OF SPECIFIC DEBTS
6.701 Objection to Discharge Versus Objection to Discharge-ability of a Debt. An objection to discharge is different from a proceeding to determine the dischargeability of certain debts. If an objection to discharge is sustained, none of the debtor's debts will be discharged. By contrast, if a particular debt is held to be non-dischargeable, the debtor may still obtain a general discharge of other debts. It is common for inexperienced bankruptcy attorneys to confuse section 727 of the Bankruptcy Code, dealing with grounds for denial of a discharge generally, with section 523, which deals with specific debts that are excepted from the debtor's general discharge.
From the perspective of an individual creditor, a judgment excepting the debt owed to it from a discharge granted to the debtor would seem to be advantageous because the post-bankruptcy claims against the debtor and the debtor's property would be reduced by the aggregate amount of all discharge-able debts, leaving only the non-dischargeable debts and the debtor's post-filing obligations. Of course a creditor, acting on a reasonable factual and
[Page 285]
legal basis, may file a complaint seeking to bar the debtor's discharge or, alternatively, to except the debt owed to that creditor from a discharge that is granted. However, once an objection to discharge under section 727 is filed, it may not "be dismissed at the plaintiff's instance without notice to the trustee, the United States trustee, and such other persons as the court may direct, and only on order of the court containing terms and conditions which the court deems proper." 101
6.702 Non-Dischargeable Debts. Only particular types of debts are non-dischargeable. These include certain taxes, domestic support obligations, and liabilities arising from a debtor's reprehensible conduct, such as fraud, which Congress excepted from the "fresh start" provided by a general discharge. However, denial of a discharge generally results from wrongdoing by the debtor in connection with the bankruptcy case.
Section 523(a) of the Bankruptcy Code specifically excepts from a debtor's discharge granted under sections 727, 1141, 1228(a), 1228(b), or 1328(b) certain specified categories of debts. The "super discharge" that was previously available under a Chapter 13 case by expanding the application of section 523(a) to the Chapter 13 discharge has been eliminated. 102 Nonetheless, there are still certain types of debts that are non-dischargeable under section 523(a) that are discharged in a Chapter 13 case. 103
Section 523(a) applies also with respect to the discharge granted an individual debtor under Chapter 11 just as it applies to an individual debtor's discharge under Chapter 7. With the exception of the application of section 523(a)(2)(A) and (B) to debts owed to a domestic governmental unit or to a person as the result of an action filed under subchapter III of Chapter 37 of Title 31 or any similar state statute, the provisions of section 523 do not apply to non-individuals receiving a discharge under Chapter 11, such as a partnership, corporation, or limited liability company. 104 When addressing exceptions to discharge, courts typically interpret the provisions of section 523(a) narrowly to protect the Bankruptcy Code's policy of providing debtors
[Page 286]
a fresh start, although there is an equal concern to ensure that debtors do not take advantage of the bankruptcy process. 105
6.703 Procedures for Objecting to Dischargeability of a Debt. An action to object to the dischargeability of a debt under section 523(a) must be commenced as an adversary proceeding and is governed by Part VII of the Federal Rules of Bankruptcy Procedure 106 as well as local rules. 107 As a result, an objection to the dischargeability of a debt is raised by the filing of a complaint. 108
6.704 Time for Filing. Except as limited by section 523(c), Rule 4007(c) requires the filing of a complaint to determine the dischargeability of a debt under section 523(a)(2), (4), or (6). The complaint must be filed within 60 days after the first date set for the meeting of creditors under section 341(a). 109 Any party in interest may seek an extension of the time to file a complaint objecting to the dischargeability of a debt "for cause." 110 The motion seeking an extension of the time within which to object to the discharge-ability of a debt must be filed before the time for objecting has expired. 111 Complaints objecting to the dischargeability of a debt may be filed by either a debtor or any creditor. 112
6.705 Extensions of Time. The enlargement of time provisions contained in Federal Rule of Bankruptcy Procedure 9006 specifically state that the bankruptcy court may only enlarge the time for filing an objection to the dischargeability of a debt in accordance with the provisions of Rule 4007(c). 113 As a result, a determination of whether an extension of time for filing an objection to the dischargeability of a debt should be allowed is not subject to the "excusable neglect" analysis applicable to the more general
[Page 287]
enlargement of time provisions of Rule 9006. 114 In situations where a debtor failed to list a creditor in its schedules so as to allow for notice of the period within which to object to the dischargeability of a debt, courts have allowed an extension of the deadline for that creditor to file a complaint. 115
6.706 Timing of Other Objections. A complaint raising an objection to the dischargeability of a debt, other than as provided for under section 523(c), may be filed at any time. 116 Even if a case has been closed, a complaint can be filed to obtain a dischargeability determination. 117 It is also possible for dischargeability objections that arise other than under subsection (a)(2), (a)(4), or (a)(6) of section 523 to be decided in a state court or other nonbankruptcy courts. 118 In any proceeding objecting to the dischargeability of a debt, the burden of proof in the action is by preponderance of the evidence. 119
6.707 Exceptions to the Dischargeability of Debts.
A. In General. There are various exceptions to the discharge-ability of debts. These different categories of exceptions are set forth in section 523(a)(1)-(19).
[Page 288]
B. Certain Taxes or Custom Duties.
1. In General. Subsections (a)(1)(A), (a)(1)(B), and (a)(1)(C) of section 523 set forth the types of taxes or custom duties excepted from the discharge that a debtor receives under Chapters 7 and 11 and under the hardship discharge of section 1328(b) and (c) in a Chapter 13 bankruptcy case. Section 523(a)(1)(B) and (C) and debts of the kind specified in section 507(a)(8)(C) also constitute exceptions to the general Chapter 13 discharge. 120 Section 523(a)(1)(A) provides that taxes or custom duties of the kind and for the period specified in section 507(a)(3) or section 507(a)(8) are excepted from discharge, whether or not a claim for the taxes was filed or allowed. 121 Section 523(a)(1)(B) excepts from the discharge taxes or custom duties relating to a return, or equivalent report or notice, that was either not filed or filed late, after any appropriate extensions, within two years before the filing of the bankruptcy petition. 122 Section 523(a)(1)(C) provides that taxes of a debtor who "made a fraudulent return or willfully attempted in any manner to evade or defeat such tax" are excepted from discharge. 123
2. Common Non-Dischargeable Tax Claims. The most common tax claims that are excepted from an individual debtor's discharge arise under section 523(a)(1)(A) and consist of tax claims existing before the bankruptcy filing that are afforded an eighth priority in connection with the bankruptcy case. These pre-petition priority tax claims include income or gross receipt taxes, property taxes, trust fund taxes, employer withholding taxes, 124 excise taxes, customs duties, and penalties related to such claims in compensation for actual pecuniary loss. 125
[Page 289]
In general, income or gross receipt taxes that are less than three years old are treated as priority tax claims and, therefore, excepted from an individual debtor's discharge. 126 In calculating the three-year period, the date the return is due, rather than the date of assessment or the date the return is filed, determines the time frame used. If an extension is granted, the date the return is due under the extension will determine when the three-year period expires. 127 For instance, federal income taxes are generally due for individuals on April 15 of each year and may be extended until October 15. If the debtor obtained an extension to file its 2012 income tax returns on October 15, 2013, a bankruptcy petition filed on October 14, 2016 would result in the taxes being considered priority obligations and therefore non-dischargeable, while if the petition was filed on October 16, 2016, the taxes would not be treated as priority and would instead be a general unsecured claim.
In addition to the foregoing, any taxes assessed within 240 days before a petition is filed are given priority treatment under section 507(a)(8) and are, therefore, excepted from an individual debtor's dis-charge. 128 This type of event typically arises when additional taxes are assessed after an audit or an amended return is filed. An assessment for un-reported taxes can occur after a taxpayer is given notice of an alleged defi-ciency. 129 This type of assessment occurs when the notice of deficiency becomes final. 130 The 240-day period is extended for any period during which an offer in compromise is pending or in effect, plus 30 days. 131 Also excluded from the 240-day period is any time during which a stay against collection proceedings is in effect, plus 90 days. 132 Furthermore, an "otherwise applicable time period" for priority treatment of taxes is suspended for any period in which collection was prevented by nonbankruptcy law or by stay in a...
