CREDITOR'S RIGHTS IN BANKRUPTCY
Creditors have alternatives for responding to a bankruptcy. Unfortunately they often "throw in the towel" upon learning a bankruptcy has been filed. A brief investigation of the case is all that is needed to find options for preserving a creditor's rights and interests.
The following discussion focuses on the most common methods for dealing with a consumer bankruptcy. These topics also apply to business cases. However, due to the complex nature of chapter 11 bankruptcy matters, a number of options for responding to business bankruptcies are not explored here. Creditors in such matters should seek the advice of counsel.
Non-Dischargeable Debts
In a chapter 7 case the debtor is trying to discharge as much debt as possible. A creditor may seek a judgment to except his debt from the discharge by filing a nondischargeability complaint with the bankruptcy court.
Generally, the debt in question falls into one of several categories including:
- the debt was obtained through fraud on the part of the debtor;
- the debtor embezzled assets or breached his fiduciary duty to the creditor; or
- the debtor is liable for willful and malicious injury to the creditor or his property.
- the debt is a consumer debt owed to a single creditor for more than $500 for luxury goods or services incurred by the debtor on or within 90 days prior to the date of the debtor's bankruptcy filing.
- the debt is a cash advance totaling more than $750 incurred by the debtor on or within 70 days prior to the date of the debtor's bankruptcy filing.
- the debt is a domestic support obligation (think alimony, maintenance or support, including child support).
These debts are discharged unless the creditor timely files a complaint on or before 60 days from the first date set for the creditor's meeting. In other words a creditor only has about 90 days after the bankruptcy is filed to take action.
Objection to discharge
An objection to discharge in a Chapter 7 is a complaint filed in the bankruptcy court by a creditor against an individual [only individuals may receive a discharge]. If the creditor is successful, the debtor is denied a discharge of all debts owed at the time of the bankruptcy petition.
There are several grounds for objecting to a debtor's discharge, including:
- the debtor failed to keep and produce adequate financial records;
- the debtor failed to explain satisfactorily a loss of assets;
- the debtor made a materially false statement in his bankruptcy papers;
- the debtor failed to obey a lawful order of the bankruptcy court; or
- the debtor fraudulently transferred, concealed, or destroyed property that would have been property of the estate.
The complaint must be filed on or before 60 days from the first date set for the creditors meeting in the bankruptcy. Typically, a creditor has about 90 days after learning of the bankruptcy case to file the complaint. With such a short time period, a creditor must act promptly to learn if grounds exist to file an objection to discharge.
Relief from the Automatic Stay
When a bankruptcy petition is filed, an automatic stay goes into effect without the need for judicial action. It stops all actions against a debtor with some limited exceptions. However, if a lawsuit was pending, or if a foreclosure or eviction was about to occur, a creditor may have grounds to request relief from the automatic stay. This is the most common motion filed by creditors. The motion is most often based upon "cause," which may include a lack of adequate protection for the creditor or where the case was filed in bad faith. Depending upon the facts of a particular case, there may be other grounds to lift the automatic stay.
Repetitive Chapter 13 Petitions
Chapter 13 is a voluntary proceeding filed by individuals who want to reorganize their finances --- usually to save a home from foreclosure. The debtor submits a plan to repay his debts. A chapter 13 solves pre-petition financial difficulties, but cases are often dismissed when a debtor suffers post-petition financial problems and is unable to meet the obligations of his Chapter 13 plan.
A debtor can file another case by showing a material change in circumstances after the prior case. Creditor participation is important to stop the cycle of repetitive cases. In some instances debtors have filed 5 or more cases before a creditor took action to stop the serial petitions.
Zero Dividend Chapter 13 Plans
Some debtors file a chapter 13 and propose a plan with a zero percent dividend to unsecured creditors. If confirmed, the debtor can discharge debts that could not be discharged in a chapter 7. However, by reviewing the bankruptcy papers and examining the debtor at the creditor's meeting, a creditor can usually get the plan dividend increased or get the case dismissed by showing the plan was not feasible or was filed in bad faith.
There are other methods for creditors to respond to a bankruptcy case. The best alternative depends upon the particular facts of a case. Creditors should seek the advice of experienced counsel.
