Suing the Debtor: Examining Post-Discharge Suits Against the Debtor

Once a debtor has been given a discharge in bankruptcy, the Bankruptcy Code affords the debtor a fresh start by protecting him from the collection activities of creditors whose claims have been discharged. Once a bankrupt debtor receives a discharge in bankruptcy, the automatic stay in effect under Section 362 is replaced with a Section 524 post-discharge injunction. However, this Section 524 post-discharge injunction does not affect the enforceability of any non-debtor liability for pre-petition debt. Thus, courts have been nearly unanimous in holding that a post-discharge injunction does not prohibit a creditor from proceeding against the debtor nominally for the purposes of establishing liability as a prerequisite to proceeding against the debtor's insurer. This principle however is simply too important to gloss over, particularly for insurance companies. Thus, this article aims to reexamine the many more tender nuances of this exception. First, this article explains the general context in which the insurance exception arises. Then, this article assesses whether a claimant must file a motion to modify the discharge injunction for the exception to apply. Courts have adopted four different approaches in this regard; generally though, either a motion is required or it is not. For courts which require a motion to modify the discharge injunction, this article explores the circumstances under which such a motion will be granted; namely if the action does not prejudice the debtor by impairing his fresh start. Next, this article discusses various defenses insurers may employ against the insurance exception. Last, this article addresses certain issues surrounding recovery after obtaining a judgment via the insurance exception.