Discharge of the Bankrupt

• Author: Roderick J. Wood
• Pages: 295-329

295

CHAPTER 10

DISCHARGE OF

THE BANKRUPT

For many individuals, the prospect of a bankruptcy discharge is the

light at the end of the tunnel. Through discharge, a debtor is given a

fresh start and is freed from the burdens of pre-existing indebtedness.

However, the right to obtain a discharge is not absolute. A discharge

may be made conditional, suspended, or denied completely in appro-

priate cases. Furthermore, not all debts are released on discharge, and

the debtor may f‌ind that discharge has rejuvenated debts that other-

wise would have been released. Discharge on bankruptcy remains a

controversial subject, as is attested by t he frequent shifts in bankruptcy

policy that attempt to f‌ind the appropriate balance between the object-

ive of economic rehabilitation of the debtor and that of maintaining

public conf‌idence in the credit system.

A. THE POLICY BEHIND DISCHARGE

The bankruptcy discharge is one of the primary mechanisms through

which bankruptcy law attempts to provide for the economic rehabilita-

tion of the debtor. However, it is not the only means by which bank-

ruptcy law seeks to meet this objective. The exclusion of exempt

property from distribution to creditors, the surplus income provisions,

and mandatory credit counselling also are directed towards this goal.

The goal of debtor rehabilitation applies only to natural person s and not

BANKRUPTCY AND INSOLVENC Y LAW296

to artif‌icial entities, and for this reason a corporation cannot obtain a

discharge unless it has satisf‌ied the claims of its creditors in full.1

The “honest but unfortunate debtor” occupies a station in bank-

ruptcy law akin to that of the “reasonable person” in negligence law.

The phrase is used again and again throughout the Canadian caselaw,

as well as that of the United States.2 In the case of the individual, the

purpose of the bankruptcy discharge is to permit the honest but un-

fortunate debtor to reintegrate into the busines s life of the country as a

useful citizen free from the crushing burden of his or her debts.3 This

marks a change from earlier attitudes towards bankruptcy that viewed

all debtors as dishonest and that did not care to draw distinctions

among reasons for f‌inancial distress.4

Debtor rehabilitation was not the original objective of the bank-

ruptcy discharge when it was f‌irst enacted in 1705. Its purpose was

to provide an incentive to cooperate, and it operated in tandem with

the death penalty as a disincentive for non-cooperative behaviour. The

use of the discharge as a reward for cooperative conduct still exists

in modern bankruptcy law. A bankrupt who fails to cooperate with

the trustee or to comply with the duties of a bankrupt may result in

the suspension5 or refusal6 of a discharge. Although the prospect of a

bankruptcy d ischarge continues to be used for the purpose of inducing

cooperation, it is no longer viewed as its primary purpose.

The Supreme Court of Canada in several of its decisions has ex-

pressly recognized t hat the economic rehabilitation of the debtor is one

of the central objectives of bankruptcy law.7 This objective proceeds

from the idea that a debtor who has acquired an unserviceable debt

load is in a hopeless situation. Lack ing any real prospect that the debts

can ever be repaid, a debtor will become discouraged and will cease to

participate in the economic life of society. The concern is not only with

the well-being of the individual. There is recognition that unservice-

able debt imposes hardship on the debtor’s family and also on society

1 BIA, s 169(4).

2 See, for example, Loc al Loan Co v Hunt,292 US 234 (1934).

3 See Holy Rosary Parish (Thorold) Credit Union Ltd v Premier Trust Co (1965), 7

CBR (NS) 169 (SCC).

4 Chapter 2, Sect ion A(1).

5 Re Jefferson (2004),1 CBR (5th) 209 (BCSC).

6 Re Rahall (1997), 49 CBR (3d) 268 (Alta QB); Mancini (Trustees of ) v Mancini

(1987), 63 CBR (NS) 254 (Ont HCJ) [Mancini].

7 See Industrial Acce ptance Corp v Lalonde, [1952] 2 SCR 109; Vachon v Canada

(Employment & Immigration Commission), [1985] 2 SCR 417.

Discharge of t he Bankrupt 297

at large. A debtor who is given a fresh start through the release of past

debts can once more become a productive member of society.

The honest but unfortunate debtor was originally idealized as an

individual who suffered f‌inancial setbacks due to events beyond his

control. In earlier times, one contemplated the merchant whose ship

was lost in a storm or through enemy action during wartime. Honesty

alone was not enough. The loss had to result from misfortune, and

the misfortune had to result from external events. There has been a

marked shift in the meaning of the phrase in modern times. Certainly

there are many instances where the f‌inancial loss results from external

factors over which the debtor has no control, such as sickness or loss of

employment. However, the notion of the honest but unfortunate debtor

now encompasses individuals whose f‌inancial distress is attributable

to poor f‌inancial management as well. This shift in meaning occurred

during a time of unparalleled growth in the consumer credit market

during the twentieth century, and coincided with a steep increase in

the number of consumer bankruptcies.

The easy availability of consumer credit has made it much easier

for debtors to get themselves into a f‌inancial cr isis. Some scholars have

argued that the pri ncipal motivation for a bankruptcy discharge should

be recognized as the protection of a debtor from ill-considered bor-

rowing decisions.8 On this view, a bankruptcy discharge operates as

a kind of insurance against losses caused by debtors who fail to prop-

erly assess the r isks associated with the over-consumption of consumer

credit.9

Although debtors who have made poor f‌inancial decisions can

nevertheless obtain the benef‌its of a bankruptcy discharge, the same

does not hold true for a debtor who is guilty of dishonest conduct.10

Furthermore, it is not only intentional di shonesty that can re sult in the

denial of an absolute discharge. The BIA establishes certain standards

of commercial morality that must be maintained. If the bankruptcy is

brought on by rash and hazardous speculations, by unjustif‌iable ex-

travagance in living, by gambling, or by culpable neglect, a bankruptcy

court is directed to refuse, suspend, or make conditional any order of

8 T Jackson, The Logic and Limits of Bankr uptcy Law (Cambridge, MA: Har vard

University Pre ss, 1986) at 232–41.

9 See D Baird, “Disch arge, Waiver and the Behavioral Un dercurrents of Debtor

Creditor Law” (2006) 73 Universi ty of Chicago Law Review 17.

10Bank of Montreal v Giann otti (2000), 51 OR (3d) 544 (CA).