A. The Policy behind Discharge

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

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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 appropriate cases. Furthermore, not all debts are released on discharge, and the debtor may find that discharge has rejuvenated debts that otherwise would have been released. Discharge on bankruptcy remains a controversial subject, as is attested by the frequent shifts in bankruptcy policy that attempt to find the appropriate balance between the objective of economic rehabilitation of the debtor and that of maintaining public confidence in the credit system.

The bankruptcy discharge is one of the primary mechanisms through which bankruptcy law attempts to provide for the economic rehabilitation of the debtor. However, it is not the only means by which bankruptcy 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 persons and

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not 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 bankruptcy law akin to that of the "reasonable person" in negligence law. The phrase is used again and again throughout the Canadian case law, as well as that of the United States.2In the case of the individual, the purpose of the bankruptcy discharge is to permit the honest but unfortunate debtor to reintegrate into the business 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.4Debtor rehabilitation was not the original objective of the bankruptcy 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...

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