More about Dealing with Very Aggressive Creditors in Bankruptcy

Posted by Kevin on April 22, 2013 under Bankruptcy Blog | Be the First to Comment

Most creditors don’t challenge your write-off of their debts in bankruptcy. But if one does, the system is poised to resolve that challenge relatively quickly.

The last blog, and this one, are about what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged.  As emphasized last time:

• Most potentially dischargeable debts DO in fact get discharged. To avoid any particular debt from being discharged, the creditor has the burden of establishing that the debt arose out of a very specific sort of bad behavior by you, one that is on a list that is in Section 523 of the Bankruptcy Code.
• Your creditors have a very firm deadline to raise such a challenge, or else lose the ability ever to do so.
• The challenge is raised by filing a complaint . This starts an “adversary proceeding,” a lawsuit focused only on this question.

Avoid Losing by Default

After a creditor files a complaint, the most important thing to realize is that the creditor will automatically win if you and your attorney do not file a formal answer at the court within the stated deadline. So contact your attorney immediately if you receive a complaint.

Most Discharge Challenges Don’t Go to Trial

The adversary proceeding can go through all the steps of a regular lawsuit. After filing the answer, there can be “discovery”—the process of requesting and exchanging any pertinent information and documents, and holding depositions (questioning witnesses under oath). And there could be various kinds of motions, pre-trial hearings, and a full trial. But these kinds of adversary proceedings rarely go through all these step and get to trial, because the amount of money at issue usually does not justify the cost involved for either side to pursue it that far. So after both sides get a clear picture of the facts, there is usually a settlement. Or the debtor does some quick math, and decides that it would be cheaper to buy off a creditor than to spend the money on additional legal fees with the possibility that you could lose at trial and be forced to pay the creditor the full amount due (note that representation in an adversary proceeding is never included in the base fee).

But if there is enough at stake, or else if one or both sides are unreasonable and insist on getting a decision from the judge, the dispute does go to trial. These trials usually last a half-day, or a day, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not. Extremely rarely, this decision can be appealed, in fact theoretically all the way up to the United States Supreme Court!

What’s So Quick and Efficient about All This?

Any litigation is very expensive, so you hope to avoid any discharge challenges. But bankruptcy court is a relatively fast and efficient forum for a number of reasons:

1) Because creditors have the opportunity to review your finances beforehand, much of the time they will not bother to raise challenges at all.

2) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts.

3) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings tend to be resolved in a matter of few months.

4) Because bankruptcy judges deal with these kinds of challenges all the time, they are extremely familiar with these legal issues.  So they move these cases fast.

Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. Help this happen by informing your attorney about any threats made by creditors before your bankruptcy is filed, and then working closely with your attorney if a creditor follows through on its threat by filing a complaint.