How Come My Attorney Cannot Always Tell me Which of My Debts Will be Discharged under Chapter 7?

Posted by Kevin on June 4, 2012 under Bankruptcy Blog | Be the First to Comment

Most of the time your attorney will know which debts will be legally written off in your bankruptcy. But not always, for two reasons.

A couple of blogs ago I made the point that the discharge order entered on your behalf by the bankruptcy judge will write off all of your debts, EXCEPT for those types of debts which are on a list in Section 523 of the Bankruptcy Code. The most common ones on the list include:

a. most but not all taxes

b. debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases

c. debts which were not listed on the bankruptcy schedules on time in a case involving assets to be distributed to creditors

d. money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship

e. child and spousal support

f. claims against you for intentional injury to another person or property

g. most but not all student loans

h. claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)

These different types of debts each deserve a closer look, which I will do in upcoming blogs. But let’s go back to the question in today’s title. Most of the time your attorney can reliably tell you whether a particular debt will be discharged in your bankruptcy case. But sometimes he or she will not know because:

1. With some types of debts—the ones described in items b, d, and f of the list above—the debt is discharged unless that creditor raises an objection by a specific deadline (which is usually 60 days after your meeting with the trustee).  So the best your attorney can do is point out to you that you may have a problem.   He or she sometimes may know that reputation of a given creditor to object under similar facts- a rough risk assessment.  But whether the risk is high or low, with these types of debts neither your attorney nor you will know for sure whether that debt will be discharged until either the creditor objects or the deadline for objection passes without objection.

2. With the other types of debts—the ones described in items a, c, e, g, and h of the list above—at the beginning of the case sometimes either the facts are not sufficiently clear or how the law should be applied to the facts is not clear, or both. You might think that the attorney should get all the necessary facts before filing the case. But sometimes the facts are simply not available, the additional work to get them is not worth the cost, or there is no time to do so because of the need to file the case quickly. Add in the consideration that the bankruptcy statutes often use broad language that can be and is in fact interpreted differently by different judges. As a result, in these situations there is simply no absolute way to know at the start of the case whether a particular debt will be discharged.

Take as an example one of the types of debt listed—a claim against you for fraud or misrepresentation.  Since intent of the debtor and reliance by the creditor are issues that the court must consider, it is not clear cut whether a claim of fraud can stand up.  For example, if you fudge your income on a loan application, but the lender based the loan on the value of the collateral instead of your income, then the lender did not rely on your stated income.  No reliance, no fraud; therefore, the obligation is dischargeable.   But your attorney will not know this until discovery is conducted (and that’s only if the lender rep tells the truth.)  So you can see that in these “gray areas” your attorney may well not be able to tell you in advance whether that particular debt will be discharged.

When you are consulting with an attorney about a bankruptcy filing, it is important to give that attorney all pertinent facts about your debts.  Moreover, you should ask your attorney whether any of your debts may not be discharged.