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Options for Dealing with a Nondischargeability Complaint

If a creditor objects to you writing off —discharging—a debt in a Chapter 7 bankruptcy on grounds of fraud, here are your practical options. 

Adversary Proceedings and the Discharge of Debts

Two weeks ago we introduced adversary proceedings—lawsuits in bankruptcy court. We focused on adversary proceedings in which a creditor objects to the discharge—write-off—of one of your debts.

This does not happen in most cases. That’s because the law makes some debts clearly dischargeable and other debts clearly not dischargeable. Recent income taxes, all criminal fines and restitution, and all child and spousal support are simply not dischargeable. On the other hand, most debts ARE simply dischargeable. There’s usually no dispute so it doesn’t take litigation to determine whether the debt will be discharged or not.

The big area where disputes can arise is when a debt was allegedly incurred through a debtor’s fraud, misrepresentation, or other similar bad behavior. Even these happen less than you might think. But they CAN happen, and sometimes when you don’t expect it. So let’s look practically at what happens in these situations.

Potentially Nondischargeable Debts

There are two main circumstances in which creditors can object to the discharge of a debt that would otherwise qualify for discharge.

First, you’re accused of incurred the debt through misrepresentation or fraud. Basically, you got the debt by lying about something important related to the debt. The classic example is providing false or incomplete information on a loan application. But this can also include debts from bounced checks or from using a credit card without intending to pay it. (See Section 523(a)(2) of the U.S. Bankruptcy Code.)

Second, you’re accused of intentionally and maliciously hurting someone or their property, causing bodily or financial harm. For example, you had an altercation with an ex-spouse resulting in some bodily harm. Someone accuses you of slashing their tires. (Section 523(a)(6).)

It’s these somewhat unusual kinds of behavior that open you up to dischargeability challenges.

If Creditor Doesn’t Complain on Time

If you are concerned about any of this, make it the first thing you talk about with your bankruptcy lawyer. You may have little or nothing to worry about. If you do have some valid concerns, it’s crucial for your lawyer to know about it. Certain steps may be taken to reduce your risks. You and your lawyer need to get prepared for dealing with the anticipated objection.

The objection will not necessarily come. Creditors have a very limited time to raise these objections. The deadline is 60 days after your “meeting of creditors,” so about 3 months after filing your bankruptcy case. As long as you give appropriate notice of your bankruptcy case, if the creditor does not formally file an objection in the form of an adversary proceeding in your case by the deadline date, the debt is discharged. That’s true even if the creditor really did have grounds upon which discharge could have been denied. A creditor may simply blow it. Or it may decide to not throw good money after bad, spending lawyer fees on a case that it may lose.

Your Options If a Creditor Does Complain

If a creditor does file a nondischargeability complaint on time, you have three basic options. You can:

  • defend yourself vigorously so that you end up not having to pay the debt after all
  • accept that you would lose the dispute and settle right away
  • push back for a time until the facts induce you to settle by paying part of the debt

Fighting to the Death

Just because a creditor believes that your actions disqualify you from discharging the debt does not mean it is correct.  The creditor may be irrationally angry at you and wants you to pay the debt no matter what. He, she, or it may not have an especially strong case but just wants you to pay. There may be enough money at stake that it is worth fighting back with everything you have. When dealing with an irrational foe, with facts in your favor, and with a lot at stake, you might have to fight back until you win.

Settle Right Away

Sometimes the opposite is true. The creditor has a strong case against you. You wrote a string of bad checks when you should have known there wasn’t enough money in your account. Your lawyer looks at the facts and advises you that you would lose the adversary proceeding. It’s time to settle the case. Avoid the cost and aggravation of fighting a losing fight and still having to pay the debt.  

Fight Back but Expect to Settle

Most dischargeability challenges are somewhere in between. The creditor seems to have some valid grounds. You have some sensible reasons why the debt should still be discharged.

But frankly it’s expensive to fight back. Once a creditor has decided to spend the money on its lawyer to file the nondischargeability case against you, it usually expects to get some money out of you. It can almost for sure more easily afford the lawyer fees than you can.

So usually what happens is that right after the creditor files its complaint, there’s some informal fact-gathering. To the extent you haven’t already done so, you tell your lawyer your side of the story. He or she exchanges information about the allegations with the creditor’s lawyer. Your lawyer advises you about any strengths and weaknesses of your case, and discusses settlement options. The lawyers hammer out a reasonable settlement, usually for you to pay a portion of the debt over time. Given that you’ve discharged all or most of your other debts, it’s something that you can afford. It’s a sensible resolution of the dispute.


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