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Thanks to the Bankruptcy Litigation Blog for the tip on this unpublished order.