What creditors are most likely to object once bankruptcy is filed?
Challenges to debt discharge usually absent from personal bankruptcy cases
The bankruptcy process allows creditors to challenge whether debts owed to them should be discharged in court. It's a right exercised in many large business bankruptcies, but when it comes to Chapters 7 and 13 cases, it doesn't happen often.
When it does occur in personal bankruptcy cases, legal experts say debtors aren't likely to see representatives of a credit card company or medical facility turn up at the 341 meeting of creditors before a court trustee. Instead, it may be associates and friends who have loaned money to the debtors or the owner of a local business who disputes the elimination of a debt during the creditors' hearing.
New York attorney Craig Robins writes on LongIslandBankruptcyBlog.com that most creditors aren't likely to take their complaint this far in a Chapter 7 case because the burden of proof falls on them. They also have to pay court and attorney fees to challenge the bankruptcy and there is a considerable amount of legal work involved in such complaints.
Creditor objections are usually based on whether the debtor failed to produce financial records, couldn't explain a loss of assets or made false statements in the petition. They may claim that the debtor didn't obey a court order regarding the bankruptcy or fraudulently transferred, concealed or destroyed property that should have been included in the individual's estate.
Another common complaint is that a debtor has used credit recently knowing that filing bankruptcy was likely. "A creditor might object to your Chapter 7 case if you ran up a lot of credit card bills in the six months to a year prior to filing," writes Georgia attorney Jonathan Ginsberg on his website, AtlantaBankruptcyAttorney.com.
If a creditor fights the discharge of a Chapter 7 debt, Ginsberg notes one recourse is to negotiate a partial payment plan for that particular debt or to convert the case to a Chapter 13 bankruptcy, which requires a court-ordered repayment plan over several years.
In some cases, a challenge may result in a lawsuit filed within the bankruptcy to dispute the discharge. This is called an adversary proceeding, and often is based on a claim of fraudulent behavior by the debtor.
On his website, Detroit attorney Walter Metzen states that the most likely scenario for a creditor to object to a discharge revolves around suspected fraud, including embezzlement of assets or malicious injury to property involved in the debt.