While most Chapter 7 cases proceed without challenge from creditors, you should be aware that the Bankruptcy Code does give creditors the right to object to your case. There are two types of objections that a creditor can file.
The first is called an objection to discharge and it applies when a creditor seeks to have your case dismissed because of fraud or misrepresentation.
The second, far more common type of objection is called an objection to dischareability of a debt. In this type of objection the creditor is not trying to get your case dismissed, but it is asking the judge to declare a specific debt non-dischargeable. In other words, the creditor does not care if your other debts are discharge, it is only focused on preserving its rights to collect a debt against you.
The grounds for a creditor to object to dischargeability are set out at Section 523 of the Bankruptcy Code. There you will see numerous grounds for objection. In practice most dischargeability objections relate to only two or three of these Code sections, which we will discuss below.
Bankruptcy Code Section 523(a)(2) – debts arising from fraud or misrepresentation. This type of objection arises when a creditor asserts that you committed some sort of fraud when incurring the debt. For example, if you filled out a credit card or loan application and stated that you earn $100,000 per year when in truth you earn $25,000 at a part time job.
Bankruptcy Code Section 523(a)(2) is also used by credit card companies to object to accounts where you took out cash advances within 70 days of filing, or made significant credit card purchase – also known as credit card binge debts – within 3 months of filing.
Bankruptcy Code Section 523(a)(6) – debts arising from wilful and malicious injury to the creditor. This type of objection might arise if you intentionally caused physical or mental harm to another. Damages arising from assaults or fights fall in this category. Another example of a wilful and malicious injury was recently heard by Judge Mullins in the Northern District of Georgia when a woman filed false criminal charges against a neighbor and the neighbor ended up in jail for 2 weeks. In that case the judge held that the damages awarded by a state court for emotional distress were not dischargeable.
Bankruptcy Code Section 523(a)(5) and (a)(15) – debts arising from the dissolution of a marriage, including alimony or child support.
Bankruptcy Code Section 523(a)(9) – debts arising from personal injury or death caused by a debtor who was driving, boating or flying an aircraft while under the influence of alcohol, drugs or another substance. Click here to learn more about this limitation on discharge.
Other non-dischargeable debts include:
- student loan debts (except in very limited circumstances)
- criminal restitution
- trust fund tax liability
- income tax liability except when the taxes are more than 3 years old and there was no misrepresentation on the tax returns
Can Dischargeability Complaints be Settled?
In some cases where there are disputes of fact, the objecting creditor and the debtor (with the assistance of counsel) can negotiate a settlement of a dischargeability complaint. For example, if a debtor fills out a credit card application while employed but with knowledge of an impending layoff but plans to seek new employment, the issue of fraudulent misrepresentation is open for negotiation.
In other cases, such as debt arising from an accident where the debtor was under the influence are more cut and dry and less likely to be negotiated.
Give Complete Disclosure to Your Lawyer
If you are concerned that a particular debt situation might give rise to a dischargeability complaint by all means tell me. The sooner I am aware of a potential problem the better advice I can give. In cases where a potential problem might or might not arise, I structure my fee agreement to provide for one level of payment if there is dischargeability litigation and a different price if there is not. Further, the cost to you will always be cheaper if we can settle disputes prior to the commencement of litigation by the creditor.