Can a Creditor Contest the Discharge of My Debt or My Bankruptcy?

When you file for bankruptcy, creditors have the right to challenge or oppose your bankruptcy discharge under certain circumstances. This process, often called an adversary proceeding, allows creditors to contest the discharge of specific debts or even the entire bankruptcy case. If you’re considering filing for bankruptcy or are already in the process, a Los Angeles bankruptcy attorney can help you understand how and why a creditor might fight your bankruptcy.

Reasons Creditors May Challenge a Bankruptcy

Creditors can oppose your bankruptcy if they believe you have acted improperly or if specific debts fall under exceptions to discharge. Here are some common reasons creditors may choose to challenge your case:

1. Fraudulent Behavior or Misrepresentation: If a creditor believes you engaged in fraudulent activities or misrepresented your financial situation in your bankruptcy petition, they can file an objection. For instance, if you transferred assets to someone else to avoid listing them in your bankruptcy case or provided false information on your petition, a creditor may challenge your discharge on these grounds.
2. Luxury Goods and Cash Advances: Purchases of luxury goods or large cash advances made shortly before filing for bankruptcy can be scrutinized. If a creditor suspects you intentionally maxed out credit cards or obtained large cash advances without the intention of repaying, they may argue that these debts should not be discharged.
3. Debts Incurred Through Fraud: Debts incurred through false pretenses, fraud, or deceit are typically not dischargeable. A creditor can challenge the dischargeability of these debts, claiming that they were obtained based on false information or fraudulent actions.
4. Non-Dischargeable Debts: Certain types of debts are non-dischargeable by default, such as child support, alimony, most student loans, and specific tax obligations. Creditors may file a challenge to ensure that these debts are not included in the bankruptcy discharge.
5. Reckless Spending or Intentional Misconduct: If a creditor can prove that you incurred debt through reckless spending or intentional misconduct, they may argue that these debts should remain your responsibility even after bankruptcy.

How Creditors Challenge a Bankruptcy

When a creditor challenges a bankruptcy, they typically do so by filing an adversary proceeding. An adversary proceeding is essentially a lawsuit within the bankruptcy case, initiated to dispute a specific issue related to the discharge of debts. Here’s an overview of the steps involved:

1. Filing a Complaint: The creditor must file a complaint in the bankruptcy court outlining the reasons for their objection. This complaint will specify which debts they believe should not be discharged or why the entire bankruptcy case should be dismissed.
2. Discovery and Evidence: After filing the complaint, both parties may enter a discovery phase where evidence is gathered. This can include financial documents, testimony, and other forms of evidence to support or refute the creditor’s claims.
3. Court Hearing: The case will proceed to a hearing where both the creditor and the debtor can present their arguments. The bankruptcy judge will review the evidence and determine whether the creditor’s claims are valid.
4. Court Decision: The judge will issue a ruling on the creditor’s objection. If the creditor’s claims are upheld, the debts in question will not be discharged, or the case may be dismissed entirely in severe cases of fraud or misconduct.

Common Types of Adversary Proceedings Filed by Creditors

Creditors can file adversary proceedings for various reasons, but here are the most common:

• Objection to Discharge: Creditors may challenge the discharge of specific debts, particularly those they believe were incurred through fraud, misrepresentation, or improper behavior.
• Objection to Entire Bankruptcy Discharge: In more severe cases, creditors may argue that the debtor should not receive any discharge due to widespread fraud or bad faith.
• Preference or Fraudulent Transfer Actions: Creditors may claim that the debtor transferred property or made preferential payments to certain creditors to protect assets from the bankruptcy estate.

How to Protect Yourself from Creditor Challenges

If you’re filing for bankruptcy, there are several steps you can take to minimize the risk of creditor objections and protect your rights:

1. Be Honest and Transparent: One of the most critical aspects of filing for bankruptcy is being honest and transparent about your financial situation. Accurately disclose all assets, debts, income, and expenses in your bankruptcy petition to avoid accusations of fraud or misrepresentation.
2. Avoid Major Financial Changes Before Filing: Making significant purchases, taking cash advances, or transferring assets before filing for bankruptcy can raise red flags with creditors. Avoid any major financial transactions in the months leading up to your filing.
3. Work with an Experienced Bankruptcy Attorney: Navigating bankruptcy law can be challenging, and an experienced bankruptcy attorney can help you prepare a comprehensive and accurate petition. Your attorney can also represent you in any adversary proceedings or objections raised by creditors.
4. Understand Non-Dischargeable Debts: Be aware that not all debts are dischargeable in bankruptcy. Understanding which debts are protected and which are not can help you manage your expectations and address creditor concerns proactively.

What Happens if a Creditor Wins Their Challenge?

If a creditor successfully challenges your bankruptcy, the court may rule that specific debts are non-dischargeable. This means you will still be responsible for paying those debts even after your bankruptcy case is completed. In more severe cases, if the creditor proves widespread fraud or intentional misconduct, the court may dismiss your entire bankruptcy case, leaving you liable for all debts.

If you lose an adversary proceeding, you may have the right to appeal the court’s decision, but the appeal process can be complex and requires strong legal grounds.

Contact Wadhwani & Shanfeld

While bankruptcy can offer a fresh start, creditors have the right to challenge the discharge of debts under certain conditions. If you are planning to file for bankruptcy, understanding the potential grounds for objections and taking proactive steps to prepare your case can help protect you from creditor challenges.

If you’re facing significant debts and considering bankruptcy, contact Wadhwani & Shanfeld. Our experienced bankruptcy attorneys can help you prepare a solid bankruptcy petition, address potential creditor concerns, and guide you through the process to achieve the financial relief you need. Reach out today for a consultation and take the first step towards financial freedom.

Source:

justice.gov/jm/civil-resource-manual-64-creditors-claims-bankruptcy-proceedings