H. The Legal Consequences of Discharge

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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1) The Release of Provable Claims

A bankruptcy discharge releases the debtor from all claims provable in the bankruptcy. The release of debts is not effective in respect of all debts or liabilities of the debtor that exist at the date of the discharge. Only those claims provable at the date of the bankruptcy are released.141

This means that debts or liabilities that arise after the date of the bankruptcy are unaffected by the discharge. Such claims are released only if the debtor undergoes a subsequent bankruptcy and obtains another discharge. A bankruptcy discharge operates to release a claim whether or not the creditor actually proved the claim in the bankruptcy. This holds true even where the debtor fails to disclose the claim to the trustee.142The concept of a provable claim therefore plays a dual role in bankruptcy law. It identifies which claims are permitted to share in the distribution of the bankrupt estate, and it also operates to extinguish these claims once the debtor obtains a discharge. Claims that are not

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provable in bankruptcy do not share in a bankruptcy distribution, but they are not released upon discharge of the debtor. For this reason, the principles that are used to determine if a claim is provable for the purposes of distribution are equally applicable to issues concerning release of the claim on discharge of the debtor.143

A debtor may have entered into a contract that contains a non-competition clause prior to the bankruptcy. The claim of the other contracting party is clearly a provable claim since it is a liability to which the bankrupt may become subject before the bankrupt’s discharge and which arose out of a pre-bankruptcy obligation.144In essence, it is a contingent claim that is subject to the valuation procedure provided for in the BIA.145A bankruptcy discharge operates to release the debtor from claims provable in bankruptcy. This releases the debtor from any liability for contractual damages in connection with the non-com-petition clause. However, the other contracting party may argue that the discharge releases the debtor only from the obligation to pay the debt, and does not affect the ability of the contracting party to obtain a prohibitive injunction to prevent the debtor from breaching the non-competition clause. The difficulty with this argument is that it erodes a central policy of bankruptcy law by tying the debtor to pre-bankruptcy obligations. Courts in the United States have held that a rule that would force the debtor to perform pre-bankruptcy employment contracts violates the fresh start policy of bankruptcy law.146The release of claims should therefore also extinguish claims for injunctive relief.

2) Discharge and After-Acquired Property

A second legal consequence of discharge is that assets thereafter acquired by the debtor are not available for distribution to the creditors but may be kept and used by the debtor. Property that is acquired by the debtor after the date of the bankruptcy, other than property governed by the surplus income provisions, vests automatically in the trustee. This automatic vesting comes to an end once the debtor obtains a bankruptcy discharge.147

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A discharge of the debtor has no effect on the administration of the bankrupt estate and the distribution of assets to creditors by a trustee.148So long as the assets were acquired by the debtor before the date of the discharge, the trustee is unaffected by discharge of the bankrupt and can administer the bankrupt estate in the usual way. A discharge of the debtor from bankruptcy should not be confused with a discharge of the trustee. The discharge of a trustee simply means that the trustee has completed the task of administering the bankrupt estate. This may occur before the date that a bankrupt obtains a discharge or after that date. It sometimes happens that an undischarged bankrupt unexpectedly acquires property through a gift or inheritance, a lottery win, or other such event after the trustee has been discharged. In such a case, the trustee can be reappointed or a new trustee can be appointed to liquidate and distribute these new assets.149

3) The Effect of Discharge on Secured Creditors

A bankruptcy discharge extinguishes pre-bankruptcy claims against the debtor. However, a creditor who has been given a security in the debtor’s property does...

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