Discharge Contract in Bankruptcy

Generally speaking, courts do not like agreements to make a debt non-dischargeable in bankruptcy. Bankruptcy courts have been unreceptive to the use of consent decrees and settlement agreements which attempt to create, by contract, a debt that will be nondischargeable in the bankruptcy of an individual.

Waivers of Discharge

Even the U.S. Supreme Court has held that waivers of discharge are unenforceable. A creditor cannot contract away a debtor’s right to defend his right to a debt discharge by using “boilerplate” covenants of nondischargeability. Occasionally a creditor will slip language into a contract that says something like: “I understand that this debt is still owed even if I file bankruptcy”.  Often this language is put into contracts used by less reputable creditors like Payday lenders or title companies.  Their hope is that the debtor will believe they are obligated to pay the debt even if they file bankruptcy.

If simply putting this language into a contract would keep the debt from being discharged in bankruptcy then every lender in the country would put that same language into every contract they entered into.  Additionally, this would completely negate the whole purpose behind personal bankruptcy.

Settlement Agreements

Settlement agreements are typically used to bring an end to parties’ disputes and provide a clear outline of the parties’ respective rights and obligations going forward.  Attorneys representing creditors will often spend a great deal of time and energy in trying to ensure that settlement agreements will actually be enforceable.

While, covenants in a settlement agreement that provide for the debtor to waive his right to a discharge are unenforceable as against public policy, creditors will still include such covenants in their settlement documents because this is an evolving area of law.  Because settlements agreements related to a fraud claim may provide a narrow exception to the normal rule of discharge ability.  If a debtor admits to fraud in a settlement agreement and later files bankruptcy the creditor may try and use the settlement agreement as the basis of a §523 action in bankruptcy court.

If you signed a nondischargeability agreement and want to know what your rights are then call us at: clint@dunawaylg.com or 480-389-6529 for a free consultation with a Phoenix bankruptcy attorney.