A discharge under 727 discharges a debtor from all prepetition debts (liability on a claim) and any liability on a claim (right to payment). But what if the debtor is sued for something other than a “right to payment”. Is that a discharge violation? Hmmm….let’s take a look at an example.
Example, Debtor and Creditor enter into a prepetition contract for creditor to sell her business to debtor for $100 and there is a covenant-not-to-compete clause whereby the creditor can enjoin the debtor from opening a competing business. Debtor files bankruptcy and gets a discharge and creditors will receive 25% on their claims.
Section 727(b) states — a discharge….discharges the debtor from all debts that arose before the date of the order for relief under this chapter, and any liability on a claim….if such claim had arisen before the commencement of the case.
Debt = liability on a claim.
Claim = right to payment.
Under these facts, creditor can argue that her right to enforce the covenenant-not-to-compete through an injunction is not a “right to payment” and therefore not a claim — and therefore….not subject to the discharge injunction which protects the debtor from further personal liability on a claim. Bankruptcy courts look to state law to see if creditor can be compelled to take money in lieu of an injunction. I’m sure there is competing case law on this.
Thanks for reading!