Under title 11 of the United States Code (the “Bankruptcy Code”), a discharge of a debt “operates as an injunction against the commencement or continuation of an action . . . to collect, recover, or offset any debt as a personal liability of the debtor.” This discharge is the “principle advantage bankruptcy offers an individual” because it provides the debtor with a “fresh start” by freeing him from the chains of previous debts.
Even so, a “discharge in bankruptcy does not extinguish the debt itself, but merely releases the debtor from personal liability for the debt.” Therefore, as provided by section 524(e) of the Bankruptcy Code, “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” Consequently, courts hold insurers liable for the debtor’s insured debt and creditors can “establish their liability by proceeding against a discharged debtor.”
This memorandum will explore whether a discharge under section 524 precludes a suit to recover from a discharged debtor’s insurer. Part I analyzes the impact of the “fresh start” policy in bankruptcy law. Part II examines the scope of a section 524 discharge and its application to a discharged debtor’s insurer. Part III concludes by analyzing the convergence of these two concepts as preventing creditors from bringing a suit to recover from a discharged debtor’s insurer when the action would impair the debtor’s fresh start.