A common concern voiced during the public meetings of the National Bankruptcy Review Commission was how to create incentives for consumer debtors to file under chapter 13 rather than chapter 7. Before additional efforts to funnel debtors into chapter 13 are considered, it is appropriate to review one of the existing statutory deterrents to the use of chapter 7—11 U.S.C. §§727(a)(8) and (9).^[2] Section 727(a)(8) denies a discharge under chapter 7 or chapter 11 to any debtor who received a chapter 7 discharge in a case filed less than six years before the present filing. Section 727(a)(9) denies a discharge to any debtor who received a discharge under chapter 12 or chapter 13 in a case filed less than six years earlier, unless the debtor in the earlier case paid 100 percent of the unsecured claims, or paid at least 70 percent of those claims and proposed the plan in good faith.

No similar provisions exist in chapters 11, 12 or 13. Thus, a debtor who previously has used chapter 7 and received a discharge is encouraged to use one of those "reorganization" chapters if seeking relief less than six years later.

How are §§727(a)(8) and (9) enforced? Do they encourage the use of the reorganization chapters? Are debtors who seek chapter 7 relief and discover they cannot obtain a discharge, and then switch to a reorganization chapter, able to repay creditors? What does the experience under these Bankruptcy Code provisions suggest about the procedures that should be used if Congress proposes further restrictions on a debtor's ability to refile under chapter 7? This article discusses the enforcement of these Code sections, and the results of their enforcement in the Southern District of Indiana.

Proper Procedure: The Cases and the Rules

In the few reported cases discussing §§727(a)(8) and (9), courts have strictly interpreted the statutory language.^[3] The six-year period is calculated from the date the previous petition was filed, not from the date of any subsequent conversion to another chapter.^[4] The prohibition against receiving a new discharge would apply even if the earlier case was filed under chapter 11 and dismissed post-confirmation.^[5]

Courts have split on the proper procedure for invoking §§727(a)(8) and (9). In most reported cases, the issue of denial of discharge was raised in an adversary proceeding brought by a creditor. One court concluded that only the U.S. Trustee or a party in interest can file an adversary proceeding, and that it must do so before expiration of the deadline imposed by Fed.R.Bankr.P. 4004—60 days after the first date set for the meeting of creditors.^[6] Another court concluded that it can order the debtor to show cause why a discharge should not be denied, invoking its powers under §105.^[7]

Although receipt of a discharge is one of the primary goals of most chapter 7 debtors, eligibility to receive a discharge is not required before one can file for relief. Congress placed the prohibition against receiving a new discharge within six years in §727, not in §109, which governs eligibility to file. Nor is ineligibility for discharge a ground for dismissal under §707. Hence, a motion to dismiss brought by a creditor or the U.S. Trustee due to the debtor's ineligibility for discharge would not seem to be proper.

An exasperating aspect of enforcing §§727(a)(8) and (9) is the impermanent denial of discharge that results when the statute is invoked. Unlike discharge denied under other subparagraphs of §727, denial of discharge under subparagraphs (a)(8) and (9) does not prevent the debts from ever being discharged.^[8] A debtor could accept denial of discharge under §727(a)(8) or (9), then wait until at least six years have passed from the earlier filing, file under chapter 7 again, and obtain a discharge of the same debts.^[9]

Enforcing the Bar

In early 1994, the Office of the United States Trustee and the bankruptcy clerk for the Southern District of Indiana developed a joint program for identifying debtors whose discharges were subject to denial because of §§727(a)(8) and (9). Every few days, the clerk in the U.S. Trustee's office responsible for entering new case information into the U.S. Trustee's database runs a report identifying repeat filers. The report matches the Social Security numbers of new filers against Social Security numbers for previous cases. The database includes Social Security numbers only from cases filed in the Southern District since the office opened in 1988.

The bankruptcy clerk also checks its database for previous filings. The clerk's database has only filings from the Southern District of Indiana. If the clerk identifies a debtor subject to §§727(a)(8) or (9), the U.S. Trustee is notified. In most instances, the U.S. Trustee has already identified the debtor, but the clerk's cross-check has identified a few debtors that the U.S. Trustee missed.

After identifying the repeat filers, a clerk in the U.S. Trustee's office checks the dockets of the earlier filings to determine whether §§727(a)(8) or (9) applies. In most instances, the earlier filing was dismissed and no discharge was entered. For those cases, the inquiry ends. Cases that were not dismissed, or cases that were dismissed after a discharge, require further investigation. If the earlier filing closed under chapter 7, the docket is checked to ensure that discharge was entered. If the earlier filing closed after completion of a chapter 12 or 13 plan, the case trustee is asked for information about plan payments so that the U.S. Trustee can determine whether unsecured creditors that filed claims were paid in full or received at least 70 percent. If so, the inquiry ends. If not, processing moves to the next step.^[10]

After this initial review, a paralegal drafts letters to debtors or their counsel in all cases that appear to be subject to denial of discharge for premature filing. In cases governed by §727(a)(8), the letter alerts debtors or their counsel to the statute's applicability and asks that the case be voluntarily converted to a reorganization chapter or dismissed by the deadline for filing a complaint to deny discharge. In cases subject to §727(a)(8), the debtors or their counsel are asked to verify that unsecured creditors received less than 70 percent; if so, the letter advises them of the statute's applicability, and requests dismissal or conversion to another chapter by the complaint deadline. Copies of these letters are sent to the chapter 7 trustee and the bankruptcy clerk.

If no response is received, the U.S. Trustee files a complaint to deny discharge.^[11] Fortunately, few such complaints have been necessary. All complaints that were filed have been concluded by default judgment or summary judgment.

The Numbers

The chart entitled Section 727(a) (8) and (9) Cases Southern District of Indiana provides additional detail on the 124 cases identified as candidates for denial of discharge between April 1994 and July 1997.^[12] During that period, approximately 45,500 chapter 7 cases were filed in the Southern District of Indiana. Clearly, cases identified as being subject to denial of discharge under §§727(a)(8) and (9) constituted a very small percentage of the total chapter 7 filings. The small number of cases is surprising given the high number of repeat filers—between five and 15 each business day.

Of the debtors identified as candidates for denial of discharge, fewer than one-third reported a previous filing within six years as required on the petition. In those cases that did reveal a previous filing, the majority showed an erroneous filing date of more than six years earlier. Most of the cases reporting the correct filing date were cases that converted from chapter 13 to chapter 7.

Sixty-one percent of the debtors identified as ineligible for chapter 7 discharge elected to dismiss their cases after receiving notification from the U.S. Trustee. Thirty percent converted to chapter 13. Three percent failed to dismiss or convert, and had their discharges denied. The remaining six percent were determined eligible under §727(a)(9).^[13] Of those debtors that converted to chapter 13, 60 percent had either completed their chapter 13 plans or were still in chapter 13 as of August 1, 1997.

An interesting question is whether the hurdles raised by §§727(a)(8) and (9) actually prevented—or merely delayed—the use of chapter 7. Of the debtors who voluntarily dismissed their cases, 19 percent refiled before August 1, 1997—after the six-year period had expired. Five percent refiled under chapter 13. Further research would be required to determine whether those that did not refile no longer required relief because creditors had written off their debts.

The ephemeral nature of the denial of discharge under §§727(a)(8) and (9) is revealed by tracking those debtors whose discharges were denied. Of the four, one had already refiled—just a few days after the six-year period expired.

The Problems

Use of these procedures has revealed some interesting problems and curiosities. The U.S. Trustees' method cannot identify a repeat filer whose earlier case was filed in a different judicial district. Two large metropolitan areas—Louisville, Ky., and Cincinnati—border the Southern District of Indiana. Conceivably, a debtor could file in Ohio or Kentucky in one year, and then refile two or three years later after relocating to Indiana. Only creditors whose obligations had been reaffirmed or determined nondischargeable would receive notice of both cases.

Given the failure of debtors to report accurately on their previous filings, some independent check on each debtor's eligibility for discharge is required in order to assure enforcement of §§727(a)(8) and (9). In only one of the identified cases did the debtor receive a discharge in another judicial district. In that case, the debtor's counsel alerted the U.S. Trustee to the earlier filing once she found out about it.

Another procedural problem not yet resolved is the failure to identify cases that were converted to chapter 7 after having been filed under chapter 11, 12 or 13 less than six years after the filing of a case in which a chapter 7 discharge was received. Additional analysis of cases that are converted to chapter 7 may be required.

Curiously, creditors have not raised the §§727(a)(8) and (9) bar to discharge. In only one case did a creditor contact the U.S. Trustee about the debtor's ineligibility for filing, and in that instance the creditor's concern was personal. The credit representative saw the refiling in her local paper and contacted the U.S. Trustee, even though the creditor's debt had been discharged in the first case and was not listed in the second.

Presumably, creditors have access to reports that show a debtor's earlier filings, even if that information is not included on the petition. Creditors may be in the best position to raise the question of ineligibility for discharge. Are creditors unaware of §§727(8) and (9)? Is it too costly to raise the issue?

Suggestions

The data collected so far permit no conclusions about whether §§727(a)(8) and (9) deter use of chapter 7 and foster greater use of the reorganization chapters, to the benefit of creditors. Experience in enforcing the provisions, however, prompts the following suggestions for Congress to consider if it chooses to develop further deterrents to the use of chapter 7:

1. Clarify the procedure. Is an adversary proceeding really necessary, or may a party proceed via motion?^[14] May the court act sua sponte, issuing its own motion to show cause why the debtor should not receive chapter 7 relief?
2. Require disclosure of all previous filings, not just those in the past six years.
3. Consider toughening the penalty for an early filing, by making permanent the denial of discharge under §§727(a)(8) and (9).

Footnotes

^[1] All views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, the Office of the United States Trustee. The author wishes to thank Beverly Bardy for her assistance in preparing the data accompanying this article. [RETURN TO TEXT]

^[2] 11 U.S.C. §109(g), which renders a debtor ineligible for relief under any chapter for 180 days post-dismissal if the case was dismissed for "willful failure...to abide by orders of the court" or voluntarily by the debtor after a motion for relief was filed, deters refiling under any chapter and thus cannot be said to encourage use of one chapter over another. [RETURN TO TEXT]

^[3] In re Donahue, 183 B.R. 666 (Bankr. D. N.H. 1995); In re Cauthen, 152 B.R. 149 (Bankr. S.D. Tex. 1993); In re Burrell, 148 B.R. 820 (Bankr. E.D. Va. 1992); In re Canganelli, 132 B.R. 369 (Bankr. N.D. Ind. 1991); In re Smith, 95 B.R. 468 (Bankr. W.D. Ky. 1988); In re Bishop, 74 B.R. 677 (Bankr. M.D. Ga. 1984); In re Marshall, 74 B.R. 185 (Bankr. N.D.N.Y. 1987).[RETURN TO TEXT]

^[4] Marshall, supra.[RETURN TO TEXT]

^[5] Bishop, supra; Smith, supra. 11 U.S.C. §1141(d) and §727(a)(8) together create a trap for the unwary. An individual debtor in chapter 11 receives a discharge upon confirmation, not after completion or even substantial consummation of a plan. If the case is dismissed post- confirmation, the individual debtor has still received a discharge and will be subject to the six-year bar of §727(a)(8). By contrast, a debtor under chapter 12 or chapter 13 does not receive a discharge until completion of the plan. Therefore, post-confirmation dismissal will not preclude a discharge in a chapter 7 case filed less than six years later.[RETURN TO TEXT]

^[6] Canganelli, supra.[RETURN TO TEXT]

^[7] Burrell, supra.[RETURN TO TEXT]

^[8] See 11 U.S.C. §523(a)(10), which does not permit discharge in a subsequent case of any debt that was or could have been listed in a case wherein the debtor's discharge was denied pursuant to §727(a)(2) through (7). Thus, debts that were denied discharge because of §727(a)(8) or (9) can be discharged in a subsequent case.[RETURN TO TEXT]

^[9] As noted below, this has occurred in the Southern District of Indiana.[RETURN TO TEXT]

^[10] At this time, the U.S. Trustee has not required a showing of good faith from those debtors who paid less than 100 percent but more than 70 percent of the unsecured claims in their chapter 12 or 13 cases.[RETURN TO TEXT]

^[11] Frequently, the U.S. Trustee must request an extension of the deadline for filing a complaint to deny discharge because a debtor has failed to comply with a stated intent to convert or dismiss, or because a motion to dismiss is pending with an objection period extending beyond the deadline.[RETURN TO TEXT]

^[12] The number of cases identified may be smaller than the actual number of cases subject to the statutes, for several reasons discussed below, but also because before July 1997 the U.S. Trustee was not reviewing those instances where the prior chapter 7 case had been dismissed after discharge. Dismissal does not render the discharge void. In re Baylies, 114 B.R. 324 (Bankr. D.D.C. 1990). See, also, the legislative history to §349, which states: "If the debtor has already received a discharge and it is not revoked, then the debtor would be barred from receiving a discharge in a subsequent liquidation case for six years."[RETURN TO TEXT]

^[13] Percentages were determined using the 120 cases that had actually been resolved by August 1, 1997. Four identified cases were still awaiting dismissal, conversion or other action.[RETURN TO TEXT]

^[14] Note that Fed.R.Bankr.P. 4004 requires an adversary proceeding for all complaints to deny discharge. By contrast, Fed.R.Bankr.P. 7001 implicitly acknowledges that some requests for turnover, when directed at the debtor, do not require all of the formality of an adversary proceeding.[RETURN TO TEXT]