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Can a Creditor Object to Me Filing Bankruptcy on Its Debt?

Object to Discharge of DebtYes, but they seldom do, because the legal grounds for them to do so are quite narrow. They usually don't have any basis upon which to object.

IF BANKRUPTCY IS ABOUT GIVING ME A "FRESH START," HOW COME CREDITORS CAN OBJECT AND DENY ME THAT?

I can't state it better than Justice John Paul Stevens of the U.S. Supreme Court:

This Court has certainly acknowledged that a central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." But in the same breath that we have invoked this "fresh start" policy, we have been careful to explain that [bankruptcy law] limits the opportunity for a completely unencumbered new beginning to the "honest but unfortunate debtor."

(From Grogan v. Garner, 498 U.S. 279, 286-287, which is a 1991 Supreme Court opinion; the quotation in it is from a 1934 opinion.)

Accordingly Congress established grounds for exceptions to the discharge of debts, those incurred by other than an "honest but unfortunate debtor."

WHAT ARE THE LEGAL GROUNDS FOR A CREDITOR'S OBJECTION?

There are two sets of debts that are not, or may not be, discharged.

One set include those that as a matter of law are excluded from your discharge of debts, without requiring any objection from the creditor. Many of these are no doubt familiar to you. Among them are child and spousal support, recent income taxes, most student loans, and criminal fines and restitution. A more thorough listing can be found on the back of the Bankruptcy Court's official form Discharge of Debtor court order, in the section titled: "Debts that are Not Discharged."

The second set, those that require an objection by the creditor, are the ones allegedly incurred by the dishonest debtor. These include three types:

  • Debts that arose by you making a false representation or committing fraud to get the loan or other form of credit. This can take the form of an intentional falsehood on a loan application, a cash advances or use of your credit card when you had no intention of paying back that credit, or any other way of deceitfully incurring a debt. (See Section 523(a)(2) of the Bankruptcy Code.) The most commonly raised objection within this type has to do with special "presumptions" of fraud that can kick in if more than $650 of credit card purchases were made on any one card within the 90 days before the bankruptcy is filed, or if more than $925 of cash advances were made on any one account within the 70 days before the filing. (See Section 523(a)(2)(C) .)
  • Debts for theft or embezzlement, for fraud while in a trust relationship, including misappropriation of money or property while in that relationship. This includes behavior such as stealing from one's employer, cheating a business partner, or inducing an elderly relative to change his or her will in your favor. (See Section 523(a)(4).)
  • Obligations resulting from intentionally and maliciously harming a person or business, or its property. This includes bodily injuries and property damage caused intentionally, such as during a domestic disturbance or bar fight. (See Section 523(a)(6).)

As I said in the first sentence of this blog post, MOST people filing bankruptcy do NOT have creditors raising these objections, because the facts necessary for them to be raised are just not that common. As you look through these three types above, you can see that they are not the usual kind of "honest" debts that most people owe.

WHAT SHOULD I DO IF I THINK THAT ONE OF THESE GROUNDS MAY APPLY TO ME?

If you nevertheless DO think that any of these types of behaviors might apply to you, be sure that you tell your attorney right away, preferably early in your first meeting.

Be sure to do this for two reasons. First, you definitely want your attorney to have the opportunity to posture your bankruptcy case in the best possible way in preparation for a potential challenge. Second, you may learn from your attorney that your concern is overblown. You certainly don't want to spend months worrying about something that is likely not going to be a problem.

DO I HAVE TO WORRY ABOUT A CREDITOR WITH AN OBJECTION RAISING IT ANYTIME INTO THE FUTURE, OR IS THERE A DEADLINE FOR IT TO DO SO?

The good news is that there is a very strict, and quite short, deadline for creditors to formally bring these kinds of objections to the bankruptcy court. Once that deadline passes, a creditor which was listed on your bankruptcy schedules has no right to ever bring such an objection in the future.

This deadline is exactly 60 days after the "meeting of creditors," which is the misleadingly named short hearing that you and I have with the trustee about a month after filing the bankruptcy case. So, that deadline comes about three months after filing. As the pertinent bankruptcy rule states, the creditor's objection "shall be filed no later than 60 days after the first date set for the meeting of creditors." The only exception is if the creditor files a motion extending that deadline, and does so "before the time has expired." Rule 4007(c).

The strictness of this deadline, and indeed the strictness of the above exception, was illustrated very recently in a formal opinion by the Ninth Circuit Court of Appeals (covering all of California and the far western states) called Willms v. Sanderson. See my discussion of this opinion in my blog post of August 25, 2013.

The bottom line is that creditors who are listed on your creditor schedules can absolutely not object on any of fraud-related grounds once this 60-day deadline passes.

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