Bankruptcy and the Adversarial Proceedings

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In bankruptcy cases, regardless of the type of bankruptcy filed, creditors do have a right to object to having their debts discharged. Like any kind of adversarial proceedings within federal law, certain rules will apply to the proceedings and the bankruptcy judge will make the final decision on the matter.

In effect, adversarial proceedings are similar to a lawsuit. A creditor, represented like a Plaintiff, objects to the discharge in bankruptcy of their debt by filing with the bankruptcy court an Objection to Discharge of Debt. The court alerts the filing debtor, now represented like a defendant, that he has a certain time frame in which to answer the notice.

The debtor must file a response to the court, evidence will be gathered and distributed to both sides, then a hearing will be scheduled, held in the bankruptcy court, and decided by the Bankruptcy Judge. Neither the U.S. Bankruptcy Trustee or panel trustee will be involved in the hearing. Creditor objections are only between the creditor and debtor.

Most all creditor objections that lead to an adversarial proceeding are based on Title 11 of the U.S. Bankruptcy Code under section 523(a), and involve only unsecured creditors. Basically, 523(a)(2) is the section typically quoted for creditor objections, and there are three kinds of non-dischargeable debt listed in this code section:

  1. Consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief;

  2. cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief; and

  3. for money obtained under false pretenses, false representation, or actual fraud.

Basically, what filing under fraudulent pretense usually means is that you made the debt knowing you were going to file bankruptcy, or you made the debt while insolvent and could not have had a reasonable expectation you could pay the debt back.

The first two rules of non-dischargeable debt under 523(a)(2) are known as the “per se” rules. The creditor objecting to the discharge under these two rules need not prove intent or fraud, only that the debt meets the criteria stated. A common name given these two rules is the 70/90 day rules.

In the first two rules of 523(a)(2), the creditor usually has the burden to prove he is not guilty of either of the rules. In the third rule of 523(a)(2), the burden of proof usually falls on the creditor that the debtor is guilty of fraud.

Many bankruptcy lawyers will charge you extra to handle creditor objections in an adversarial proceeding. It takes them more time and work, and although it is normal in the bankruptcy process, it is often the exception to the rule. Lawyers, therefore, do not include creditor objections and adversarial proceedings in with their basic bankruptcy fees. Ask your lawyer at your first meeting how he or she will handle creditor objections and adversarial proceedings.

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