Posted on April 05, 2017 in Discharge of Debts

In our example about the adversary proceeding about whether a debt gets discharged, here are the creditor’s and debtor’s closing arguments.

Here’s the fifth blog post in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last four posts about the different steps in the “adversary proceeding” so far, including the trial itself. Now it’s time for the two sides to give their closing arguments to the bankruptcy judge.

The Creditor’s Closing Argument

The lawyer for the creditor says the following to the bankruptcy judge:

As the U.S. Supreme Court said way back in 1934, bankruptcy law “gives to the honest but unfortunate debtor... a new opportunity in life... unhampered by the pressure and discouragement of preexisting debt.”

As the debtor here fully admits, he was NOT honest with his creditor, Heather, his aunt. Marshall admitted that he purposely did not include his debt to another aunt on his loan application to Heather. He admitted that he did this because he was afraid that otherwise Heather would not give him the loan. He desperately wanted that loan. It was the only way he could start his business. So he stooped to lying, and put his lie in writing. He then signed the loan application, dishonestly asserting that what he wrote was truthful.

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 Posted on April 03, 2017 in Discharge of Debts

In our example about the process about whether a debt gets discharged, here’s what happens at the bankruptcy court trial itself.

This is the fourth blog post in a series showing how a legal dispute gets resolved in bankruptcy court. The process is called an “adversary proceeding”—essentially, a lawsuit in bankruptcy. The dispute at issue is whether a debtor’s Chapter 7 “straight bankruptcy” will discharge—permanently write off—a particular debt.

The Story So Far

The creditor, Heather, has formally objected to the discharge in a complaint—see our blog post of a week ago. Essentially, she alleged that the debtor, Marshall, her nephew, lied in the credit application she asked him to complete. He did not include a $7,500 debt that he owed to another aunt. Because of this fraud on her, Heather has now argued that Marshall should not be able to discharge the $21,000 that he still owes her.

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 Posted on March 31, 2017 in Discharge of Debts

Here’s how the debtor and creditor get at the facts in an adversary proceeding about whether a debt gets discharged.

We’re going through a series of blog posts showing by example how a creditor’s formal objection to discharge goes in bankruptcy court.

Here are the facts, briefly. Five years ago Marshall got a $35,000 loan from his aunt, Heather. But he wasn’t completely upfront with her at the time, neglecting to list in his loan application a $7,500 debt to another aunt. So now, after Marshall filed bankruptcy, Heather filed a formal complaint accusing him of fraud for this lying by omission. Specifically, she alleged that his omission about the other loan was “materially false,” Heather “reasonably relied” on that omission in making the loan, and Marshall made the omission “with intent to deceive” her. (There are other elements of fraud but these are the ones that are at issue in this example.)

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 Posted on March 29, 2017 in Discharge of Debts

Here’s an example showing how to answer a creditor’s complaint objecting to the legal write-off of a debt in bankruptcy.

The last blog post showed, through an example, how a creditor in a Chapter 7 bankruptcy case raises an objection to the discharge of its debt. Please check that out for the full facts of the dispute and what had happened so far. Today we pick up where we left off, after the creditor has formally filed its objection to discharge.

Summary of the Loan and the Complaint

Basically, the story is that five years ago Marshall persuaded his aunt to lend him $35,000 for a business loan. He completed the required loan application without referring to a $7,500 balance he already owned on a personal family loan. He’d made payments on that personal loan perfectly. So he rationalized his omission by figuring that this existing loan was more of a positive than a negative. It demonstrated his creditworthiness on family loans instead of being any kind of detriment. Nevertheless he didn’t want to give his unpredictable aunt, Heather, a reason to not give him the new $35,000 business loan.

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 Posted on March 27, 2017 in Discharge of Debts

Here’s an example showing in a practical way what happens when a creditor objects to the legal write-off of a debt in bankruptcy.

The last three blog posts were about the procedure for litigating whether a debt gets discharged in bankruptcy. Let’s bring this to life with an example.

The Loan

Marshall had spent 10 years learning everything he could learn as an auto mechanic at the local Ford dealership. He was 30 years old, and itched to open his own auto repair shop. So, five years ago, Marshall asked his financially well-off aunt, Heather, to lend him $35,000 to help him to start his business. She had her concerns, but agreed, only if they did it in a business-like manner. So she had her lawyer write up a loan application and promissory note.

Marshall completed the loan application, but not quite accurately. He was too embarrassed and afraid to include a $7,500 debt he already owed to another aunt. She was from the other side of the family so he knew Heather wouldn’t find out about that debt. Besides, he’d been paying on it perfectly for years, bringing the balance way down from its original amount. So he figured that, if anything, that loan was proof of his creditworthiness with family loans. But he didn’t want to risk Heather not seeing it that way and not giving him the business loan.

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 Posted on March 24, 2017 in Bankruptcy Procedure

The trial, almost always in front of a bankruptcy judge and no jury, is the final determinator whether the challenged debt gets discharged.

Today’s is the last of three blog posts on the procedure for litigating whether a debt gets discharged in bankruptcy.

Discharge Challenges Are Rare, Going to Trial is REALLY Rare

To determine whether or not a debt gets discharged in bankruptcy very rarely involves any litigation. The vast majority of debts are simply discharged. Those that are not are the exception. And most of those exceptional debts that bankruptcy does not discharge are either never discharged—such as child support—or are not discharged unless some rather clear conditions are met—such as with income taxes.

With the debts that are easily discharged, the creditors have no grounds to object and so they don’t. With debts that clearly cannot be discharged, there’s no point for debtors to complain and so they don’t.

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 Posted on March 22, 2017 in Bankruptcy Procedure

“Discovery” covers all the methods used to get at all the relevant facts in a dispute with a creditor about the discharge of a debt.

Our last blog post was about the beginning of the “adversary procedure” for deciding whether a disputed debt gets discharged. Like many other legal procedures, it starts with a formal summons and complaint, here usually filed by a creditor.

(Either a creditor or debtor can file a complaint. But since we are focusing on debts that get discharged unless a creditor objects, for our purposes we assume that it’s the creditor filing the complaint and the debtor responding to it.)

The debtor responds to the complaint with either a motion to dismiss or an answer. The motion to dismiss is appropriate when the creditor’s complaint does not make an argument clear enough to respond to. An answer states step by step what, if any, parts of the complaint the debtor agrees with and what parts the debtor does not.

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 Posted on March 20, 2017 in Bankruptcy Procedure

If you decide not to settle but rather fight a creditor trying to make you pay a debt that you want to discharge, here’s what happens.

Last time we got into the three practical options if a creditor objects to the discharge of one of your debts. Two of those options involve settling the dispute, either immediately or after learning the strengths and weaknesses of your position. The third option is having the bankruptcy judge decide whether or not the debt should be discharged.

That involves going through the entire adversary procedure, the bankruptcy court’s version of a lawsuit, all the way to the judge’s ruling and judgment. (There is no jury in bankruptcy adversary proceedings.)

If you go all the way through an adversary proceeding, what are the steps this involves?

The Start

An adversary proceeding to decide whether a debt gets discharged starts like any other lawsuit. The creditor files a complaint in the bankruptcy court laying out why it thinks the debt should not be discharged.

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 Posted on March 17, 2017 in Discharge of Debts

If a creditor objects to you writing off —discharging—a debt in a Chapter 7 bankruptcy on grounds of fraud, here are your practical options.

Adversary Proceedings and the Discharge of Debts

Two weeks ago we introduced adversary proceedings—lawsuits in bankruptcy court. We focused on adversary proceedings in which a creditor objects to the discharge—write-off—of one of your debts.

This does not happen in most cases. That’s because the law makes some debts clearly dischargeable and other debts clearly not dischargeable. Recent income taxes, all criminal fines and restitution, and all child and spousal support are simply not dischargeable. On the other hand, most debts ARE simply dischargeable. There’s usually no dispute so it doesn’t take litigation to determine whether the debt will be discharged or not.

The big area where disputes can arise is when a debt was allegedly incurred through a debtor’s fraud, misrepresentation, or other similar bad behavior. Even these happen less than you might think. But they CAN happen, and sometimes when you don’t expect it. So let’s look practically at what happens in these situations.

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 Posted on March 15, 2017 in Student Loans

To legally write off —discharge—a student loan in bankruptcy takes an extra step: proving that it is causing you “undue hardship.”

Adversary Proceedings and the Discharge of Debts

Our last several blog posts have been about adversary proceedings—lawsuits in bankruptcy court. In rare circumstances you might be on the receiving end of an adversary proceeding. Or you may use the advantages of bankruptcy court to file your own adversary proceeding against a creditor.

Last Friday’s blog post was about some of the reasons you’d consider suing a creditor during your bankruptcy case. The first reason was to discharge—legally write off—a debt that would otherwise not be discharged. Student loans fall in this category.

Most debts are discharged in bankruptcy without you having to take any special action against them during your case. This includes virtually all medical debts, credit cards, and the vast majority of other personal and business debts. Some other debts are never discharged—child and spousal support and criminal fines, for example. And finally, other debts may be discharged but only under certain circumstances. These include income taxes and student loans.

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