Bankruptcy court is a relatively efficient place to determine whether or not you must pay a debt which the creditor says can’t be discharged.
One of the realities about filing a consumer bankruptcy case is that your case can get much more challenging if you have a very aggressive creditor. Most creditors take your bankruptcy filing in stride as a normal part of their business, figuring that you’re doing it for a sensible reason. But some creditors take it personally and react with more anger than good sense—often because they have some personal connection to you like an ex-spouse or former business partner. Or other more conventional creditors may honestly believe that they have grounds to prevent their debt from being discharged.
This blog, and the next one, are about what happens when there is such a creditor. The topic here is is not about creditors with rights to collateral, where the issues focus on what will happen to the collateral. It’s not about debts which will clearly not be discharged, like recent income taxes or child support obligations or most student loans. Rather this is about debts that would normally be discharged unless the creditor can prove that the debt arose of some bad behavior by you, usually involving some sort of fraud, theft, drunk driving, or such. Not just any bad behavior will do; it has to be one of a specific list that is in Section 523 of the Bankruptcy Code.
Creditors Have to Put Up or Shut Up
Before filing bankruptcy, you may be told by a creditor’s representative or collection agent that a debt can’t be discharged in bankruptcy or that they will fight you if you file bankruptcy. Most of the time they’re bluffing you. But for sure tell your attorney about the threat so that he or she can determine whether it has any merit. If it doesn’t, that will avoid unnecessary worry for you. In the unlikely event the threat does have merit, that will help your attorney prepare for a challenge by the creditor if it comes.
Even if a challenge has legal merit, a creditor may not pursue it for practical reasons, mostly to avoid putting out more money—in filing fees and attorney fees—to try to prove that you can’t discharge the debt, only to risk losing that battle and wasting its money. At least in theory the law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.
And you don’t have to sit around wondering for long whether or not any creditor will raise a challenge. Except in very rare circumstances (such as forgetting to list the creditor in the bankruptcy documents), any creditor that has any objections to the discharge of its debt has only 60 days from your hearing with the trustee to formally file an objection or forever lose its opportunity to do so. Since that meeting (also called the “meeting of creditors” or “341 hearing”) usually happens about a month after your case is filed, this means that within about 3 months after filing you will know.
The “Adversary Proceeding”
The creditor may tell your attorney in advance about an intended challenge, usually in an effort to get you to settle the matter by agreeing to pay part or all of the debt. But much of the time the creditor just files a formal complaint at the bankruptcy court. This begins what is in effect a mini-law suit, called an adversary proceeding, focusing only on whether the creditor can prove the facts that the law requires for the debt to be excluded from discharge. This issue is usually NOT on whether you owe the debt in the first place—that’s usually assumed and admitted. Rather the issue would be whether, for example, you incurred the debt by falsifying a credit application, by never intending to pay it through bounced checks, by coercing a relative to change their will on your behalf… behavior of this sort.
Please come back to the next blog in a couple days for the rest of the story about what happens in these adversary proceedings.