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The Procedure to Determine whether a Debt Should be Discharged

If you decide not to settle but rather fight a creditor trying to make you pay a debt that you want to discharge, here’s what happens. 


Last time we got into the three practical options if a creditor objects to the discharge of one of your debts. Two of those options involve settling the dispute, either immediately or after learning the strengths and weaknesses of your position. The third option is having the bankruptcy judge decide whether or not the debt should be discharged.

That involves going through the entire adversary procedure, the bankruptcy court’s version of a lawsuit, all the way to the judge’s ruling and judgment. (There is no jury in bankruptcy adversary proceedings.)

If you go all the way through an adversary proceeding, what are the steps this involves?

The Start

An adversary proceeding to decide whether a debt gets discharged starts like any other lawsuit. The creditor files a complaint in the bankruptcy court laying out why it thinks the debt should not be discharged.

A debtor can also start the process, filing a complaint showing why the debt should be discharged. This happens with the kinds of debts that wouldn’t be discharged without a court determination that they are. This applies to establishing “undue hardship” to qualify to discharge a student loan. It may also apply to showing that an income tax return was not filed to evade taxes.

But for today’s and the next few blog posts we’re assuming that the creditor is filing the complaint. It’s the kind of debt that would be discharged unless the creditor complains, and does so on time. So it’s usually better for you just to wait and see whether any creditor is going to raise any objections. Often even when they threaten to do so they don’t because of their costs and risks if they do.

The Summons and Complaint

The complaint lays out the creditor’s argument in a legalistic, point-by-point fashion. It states the facts and circumstances why the creditor believes the debt should not be discharged. It ends by asking that the bankruptcy court make a ruling that the debt does not qualify for discharge.

The court issues a summons to inform you of the filing of the complaint, and of your deadline to respond.

The creditor “serves” the summons and complaint on you and on your bankruptcy lawyer. Unlike most lawsuits, this is done by regular mail. Yours is mailed to the address in your bankruptcy filing. This is one good reason to be sure that the court is officially informed of any address changes, and that you monitor your mail carefully.

Responding to the Creditor’s Complaint

If you don’t respond by the stated deadline, the creditor will generally get whatever it is asking for in the complaint. The debt would be declared not discharged and the court would enter a judgment against you saying so.

You and your lawyer have basically two ways to respond to the complaint.

Motion to Dismiss or Compel a More Definite Statement

A complaint may not lay out clearly enough the creditor’s factual and legal argument. It may not make a clear enough case why the debt should not be discharged. It has to give you enough information so that you know what you are defending against.

If not you can ask that the court dismiss the adversary proceeding, unless the creditor fixes the complaint’s deficiencies. If the court agrees and the creditor doesn’t amend its complaint, the court can dismiss the whole proceedings. That sometimes does happen if in the meantime the creditor realizes that it really doesn’t have a good case. Your lawyer may have told the creditor’s lawyer your side of the story, poking holes in the creditor’s argument. The creditor realizes that it’s wasting money, and either pulls out or negotiates a reasonable settlement.

Otherwise the creditor makes the necessary corrections in the complaint and the adversary case moves forward.

Your Answer

If and when the complaint properly lays out the creditor’s argument, you can file an answer. The answer responds point by point to every allegation in the complaint, saying whether you admit or deny each one.

You also have and usually must take the opportunity to provide any defenses to the allegations. These are reasons that may justify or excuse the allegations, and still make the debt dischargeable.

This is also usually the right time to raise any counterclaims. These are any related complaints you may have against the creditor. For example, the creditor may have cheated you in some way in the debt transaction, or in the debt collection process.

It can be crucial to raise defenses or counterclaims at this point in the process. You may be legally prevented from doing so later.  

This is one of the reasons to be completely honest and thorough with your lawyer. It’s important to do so from the beginning of your first meeting with him or her. But to be realistic, you can’t always focus on or remember everything that might possibly be relevant or important in your first meeting or two with your lawyer. But once an adversary proceeding complaint is filed, it’s absolutely necessary that you think through and tell your lawyer everything.

There is nothing that shoots down a creditor’s complaint better than an airtight defense. And sometime there’s nothing that defends you better than taking the offensive with a great counterclaim.

We’ll explain what happens after you file your answer in our next post in a couple days.


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