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I am doing some research on third party releases and I just want to get some clarification.

from this article: https://www.abi.org/abi-journal/requirements-for-the-approval-of-third-party-non-debtor-releases

Upon confirmation of a reorganization plan in a chapter 11 case, the debts of the bankrupt entity are discharged pursuant to §1141(d) of the Bankruptcy Code. 11 U.S.C. §1141(d) (2003). While this discharge does not apply to non-debtor entities, debtors have sought to expand the scope of the discharge to include the release of claims against third-party non-debtor entities including insiders and affiliates of the debtor.

https://journals.library.columbia.edu/index.php/CBLR/announcement/view/432

At the moment, the Ninth and Tenth Circuits flatly prohibit nonconsensual third-party releases on the basis that 11 U.S.C. § 524(e), which provides generally that “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,” prohibits them.[12] Most circuits, however, hold that the broad sweep of 11 U.S.C. § 105—which permits bankruptcy judges to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions” of the Code—authorizes courts to immunize non-debtors under certain circumstances

Question 1 in regards to "While this discharge does not apply to non-debtor entities" so if I'm understanding, non-debtors/third parties are not discharged through a regular chapter 11 discharge? and instead they have to get a release? am I reading that correctly?

Question 2 in regards to "which provides generally that “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," what does it mean "does not effect the liability" does that mean the non-debtor/third party can still collect from the debtor after the debtor uses It's discharge and discharges It's debts?

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Question 1 in regards to "While this discharge does not apply to non-debtor entities" so if I'm understanding, non-debtors/third parties are not discharged through a regular chapter 11 discharge?

Correct.

and instead they have to get a release? am I reading that correctly?

No. Third-party non-debtors, such as personal guarantors of loans and bonding companies and insurance companies covering personal injury claim debts and general partners of bankrupt partnerships, remain fully responsible for the debts and the creditors can recover their claims from these persons.

Part of the confusion you are having may be that "debtor" in this sentence is being used in the specialized bankruptcy sense of someone who files a bankruptcy petition, rather than in the ordinary sense of someone who owes a debt to a creditor.

Question 2 in regards to "which provides generally that “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," what does it mean "does not effect the liability" does that mean the non-debtor/third party can still collect from the debtor after the debtor uses It's discharge and discharges It's debts?

No. It means that if a third-party such as a personal guarantor shares responsibility to a creditor for a debt, the creditor can still collect the debt from the third-party who is also responsible for it.

It also means that collateral for loans can still be seized to the extent that this collateral arrangement was not modified in the bankruptcy which by default it would not be.

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  • thank you for the response! So for instance: the debtor uses discharge, a non-debtor/ third party can no longer collect from the debtor BUT the creditors can still collect from the non-debtor/third party. is that correct?
    – ehh hhh
    Jun 23 at 19:08
  • Yes. although as used in this sense, the non-debtor/third-parties being referred to are usually not actually creditors of the debtor. Instead, they are usually co-debtors with the bankrupt party.
    – ohwilleke
    Jun 23 at 22:24

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