A discharge is not a blanket cancellation
A discharge is intended to permit a new financial start after compliance with the proceeding, but the legislature excluded obligations to which an ordinary discharge does not apply. The distinction relates to the character of the debt and the circumstances in which it arose.
Principal exceptions
The statute excludes, among other obligations, punitive payments, debts created through fraud, and court-ordered support obligations. The statute provides only limited authority to depart from the support-debt exception. Legal substance matters more than the label placed on the debt.
What is a debt created through fraud?
Not every contractual dispute or nonpayment constitutes fraud. The facts, prior findings, and relationship between the conduct and creation of the debt must be examined. A creditor invoking the exception must establish it through the appropriate procedure.
Debts owed to public authorities
It is incorrect to assume either that every public debt is excluded or that every such debt is discharged. The principal, fine, punitive component, interest, and any other charge should be separately identified and tested under the applicable law.
Review before commencing proceedings
If a substantial portion of the debt may be nondischargeable, that fact affects the utility of the proceeding and the rehabilitation plan. Judgments, demands, and debt instruments should be collected and each component classified.
Concluding point
The inquiry is not only how much debt exists, but what kind of debt it is and whether the law permits its inclusion in a discharge.
Principal legal source
- Section 175 of the Insolvency and Economic Rehabilitation Law, 5778-2018.