Georgia Bankruptcy Blog

In In re Delco, Chapter 7 Case No. 04-92036, Adv. No. 04-06377, the trustee filed a Complaint objecting to the Debtor's discharge based upon, inter alia, undisclosed preferential transfers to debtor's parents, failure to provide documents, etc.  The trustee subsequently sought approval of a settlement of the adversary and claims issues, whereby some, but not all, creditors would be paid by the debtor's parents.  Additionally, the parents would also pay to the estate $3,500 for administrative expenses.  The parties to the settlement would then exchange full releases and the discharge action would be dropped.

Judge Murphy did not approve the settlement in this Order --

Settlement of an objection to a debtor's discharge for payment of money is tantamount to allowing a debtor, or his parents in this case, to purchase his discharge.... Public policy requires that any attempt to compromise a proceeding to deny Debtor's discharge based upon the payment of money must be disallowed....   A compromise in which a party agrees, in exchange for the payment of money, to dismiss an action to deny a debtor's discharge is tantamount to allowing a debtor to purchase a discharge…. Allowing the dismissal of an action to deny a debtor's discharge to be conditional upon Debtor's payment of money encourages the use of an objection to discharge as a weapon to induce the debtor to accede to demands which may be otherwise excessive."

Thanks to the Bankruptcy Litigation Blog for the tip on this unpublished order.

Several years ago, I represented a debtor who attempted to discharge a large obligation to a former business partner. The business partner filed an objection that included both an Objection to Discharge and an Objection to Dischargeability of a debt.
The Objection to Discharge was premised on an alledged fraudulent transfer of assets within a year of filing and the dischargeability objection was based on alleged fraud in the underlying transaction.
After extensive negotiation we reached a financial settlement in which the discharge count was dismissed while the Section 523 dischargeability count was the basis of the settlement.
All parties including the Chapter 7 trustee, credtors counsel and myself, proceeded in this fashion because of our recognition that conduct that could support a denial of discharge cannot be negotiated away.
The lesson for creditors - if you have any desire to settle, file your objection under both 727 and 523 to leave wiggle room for settlement.