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Going to Trial on a Nondischargeability Dispute with a Creditor

The trial, almost always in front of a bankruptcy judge and no jury, is the final determinator whether the challenged debt gets discharged. 

Today’s is the last of three blog posts on the procedure for litigating whether a debt gets discharged in bankruptcy.

Discharge Challenges Are Rare, Going to Trial is REALLY Rare

To determine whether or not a debt gets discharged in bankruptcy very rarely involves any litigation. The vast majority of debts are simply discharged. Those that are not are the exception. And most of those exceptional debts that bankruptcy does not discharge are either never discharged—such as child support—or are not discharged unless some rather clear conditions are met—such as with income taxes.

With the debts that are easily discharged, the creditors have no grounds to object and so they don’t. With debts that clearly cannot be discharged, there’s no point for debtors to complain and so they don’t.

There are only a few specific circumstances in which creditors have grounds for objecting to discharge. Mostly this is either when the debtor allegedly incurred the debt fraudulently, or caused “willful and malicious injury” to the creditor or its property. Since these circumstances do not apply to most debtors, creditors don’t usually object to a debt’s discharge.

When creditor’s DO object to discharge, the matter very seldom goes all the way to trial. That’s consistent with lawsuits in general—they seldom go to trial. Creditor objections to discharge are usually either:

  • dismissed (withdrawn or thrown out) because the creditor did not have valid grounds to object
  • settled with the debtor paying the full debt because the grounds for objection were solid
  • settled with the debtor paying only a portion of the debt because the grounds were weaker, but not weak enough to justify dismissing the objection

Why Creditor Objections to Discharge Seldom Get All the Way to Trial

The one-word answer is: money. Litigation is expensive.

Nondischargeability litigation is usually less expensive than most because the legal and factual issues are often narrower. For example, if you are accused of fraud by not including a significant debt in your written application for a loan, a key factual question may be whether the creditor reasonably relied on that inaccuracy when making the loan. That may simply turn on whether the lender pulled a credit report before making the loan, and whether that missing debt was disclosed on that credit report. If so, the debtor would have a strong argument that the creditor did not reasonably rely on the debtor’s incomplete loan application, which is a required element to show fraud.

But even if the issues are comparatively simple, litigation can still be an inefficient dispute-resolving mechanism. Going through “discovery” to get at all the pertinent facts can take a lot of time and effort. The truth of what happened can be slippery.

And of course lawyers are expensive. Unless the amount of debt is very large, the cost of litigating can approach or even exceed the amount in dispute. Spending so much  doesn’t make economic sense. So there is lots of practical pressure on both sides to settle a nondischargeability dispute quickly. And that almost always means doing so before it gets all the way to trial.

Settlement by Mediation or Arbitration

If the debtor and creditor can’t settle informally, most bankruptcy courts encourage “alternative dispute resolution” through mediation or arbitration.

Mediation involves a mutually respected mediator who can’t force settlement but can effectively encourage it. The mediator helps each side see the truth of their positions, often successfully inducing settlement.

Arbitration is a simplified trial-like procedure in which the arbitrator determines whether or not the debt is discharged. That determination may be binding or not. Either way, it can be a quicker way of getting to a determination or settlement.

Neither of these procedures is inexpensive, but usually cost much less than a full trial.

Going to Trial

A trial is the culmination of a lot of effort. The complaint has laid out the creditor’s step-by-step argument why the debt should not be discharged. The debtor has made clear which parts of that argument her or she disputes. Both parties have dug up the facts through the discovery process. Now it’s time bring it all together in front of the bankruptcy judge.

Trials in bankruptcy adversary proceedings are almost always in front of a judge instead of a jury. That streamlines the process considerably. Most consumer nondischargeability trials take only from a half day to one or two days. As we said above, the issues tend to be pretty sharply focused. So the evidence that each side presents can be presented relatively quickly.

The trial generally proceeds in the way you can imagine from everything you’ve heard about court trials. Each side usually makes an opening statement about what they intend to prove. Then each side presents witness testimony and documentary evidence to support its argument. There is opportunity to challenge the testimony and evidence presented by the other side. There are detailed rules about what evidence can be presented and how.

After all the evidence has been presented, and each side has had the opportunity to rebut the other’s evidence, each gives a closing statement. Then the judge, after weighing all the testimony and evidence, decides whether the debt at issue is discharged or not. He or she enters a judgment so stating.


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