Are Creditors Going to Challenge the Discharge of Debts in My Bankruptcy Case?

Posted by Kevin on June 13, 2012 under Bankruptcy Blog | Be the First to Comment

Every creditor has the right to challenge your ability to write off your debts in bankruptcy. But none of them likely will. Why not?

For most people filing bankruptcy, every debt they intend to discharge (write off) will in fact be discharged.

There are two categories of debts that are not discharged in bankruptcy. The first category includes those special ones that Congress has decided for policy reasons simply should not be subject to a bankruptcy discharge. Among the most common ones are spousal and child support, most student loans, and many tax obligations. Assuming you are represented by a competent bankruptcy attorney, you will know before your case is filed if any of your debts fall into this category.

The second category of debts includes those that are discharged UNLESS the creditor files a formal objection to the discharge. Any creditor can raise an objection. But creditors very seldom do, for these reasons:

1. Although any creditor can challenge your discharge of its debt, it can only win such a challenge if it can prove that you acted inappropriately in certain very specific ways.  Proving inappropriate action is not easy and it can be costly.   Many creditors first impulse is that they will fight the discharge.  Then after they sit down with a lawyer and find out what it is going to cost and what the chances of success are, a vast majority of creditors are sensible enough to not throw the proverbial good money after bad chasing a hopeless cause.

2. On top of that, bankruptcy law discourages creditors from raising challenges in two ways:

a. Debts are presumed to be dischargeable—at least if they do not fit any of the special nondischargeable debts in the first category referred to above. So the creditor has the burden of proving that the debt is not dischargeable, and the debt is discharged if it fails to provide the necessary evidence to meet that burden.

b. The creditor risks being ordered to pay YOUR costs and attorney fees for defending a challenge if you defeat the challenge. This is an added disincentive for a creditor to push a challenge when it has weak facts against you.

However, there are two situations where a debtor may get challenged on her discharge:

1.  In cases involving use of credit card for luxury purchases within 90 days of filing or obtaining cash advances within 70 days of filing, there is a presumption that the debtor is trying to defraud the creditor.  Since this presumption makes it easier to prove the case, creditors will bring this type of action.

2.  Also, you may have a creditor who is motivated less by economic good sense than by a desire to cause you trouble, say an ex-spouse or former business partner.

The best way to deal with these situations is, first, to be completely honest with your attorney in answering every question he or she asks you, whether during a meeting or when providing information in writing. Be thorough in your responses. And second, if you have ANY concerns along these lines, make a point of voicing your concerns, and do so early in the process. Particularly, if you wonder whether you’ve acted inappropriately with any of your creditors; or if you have any personal creditors who are carrying a grudge, discuss it with your attorney. It may be that your concerns are unfounded and that would be a relief.  However, if your concerns are real, then it is better to prepare for opposition ahead of time.