More about Debts Whose Write-off Can be Challenged in Bankruptcy

It’s quite uncommon for a creditor to challenge your write-off of its debt. Here’s more about what happens if one does.

Last week’s blog post got into what happens when a creditor raises one of the few available arguments to try to prevent its debt from being legally discharged. (This is different from the debts that by their very nature are excluded from being discharged and so don’t need to be challenged—they simply are not written off—criminal fines, child and spousal support, for example.)

We learned last week that:

  • Most debts DO actually get discharged. In most consumer bankruptcy cases, no debts are challenged. That’s because the creditor would have to establish that the debt was related to a very specific kind of your bad behavior.
  • Your creditors have a very firm deadline—only about three months from the filing of your bankruptcy case—to raise such a challenge, or else completely lose the right to do so.
  • The challenge is raised by filing a “complaint” in the bankruptcy court by that deadline, stating the facts and law under which the debt should not be discharged. This begins an “adversary proceeding” which focuses on that one question.

In the unusual event that such a challenge is raised in your case, here are a couple more important things to realize about it.

Don’t Lose by Default

After a creditor does file a complaint trying to show that its debt shouldn’t be discharged, the single most important thing to realize is that it will automatically win if you and your attorney do not deal with it by the provided deadline. You do so by filing a formal answer at the court within that deadline or by getting back to the creditor to resolve the dispute. So if you get a complaint in the mail during your bankruptcy case, get in touch with your attorney right away. Sometimes you may be expecting it because of your prior discussions with your attorney.  Other times it’ll come unexpectedly. Either way, contact your attorney right away to work out your action plan.

Even if a Challenge is Raised, It Will Very Seldom Go to Trial

Adversary proceedings can go through all the steps of a conventional lawsuit. After your attorney files  an “answer”—a formal response to the allegation in the complain—there can be “discovery”—the process of exchanging relevant information and documents between the two sides, and possibly having one or more depositions, the questioning of witnesses under oath, which would usually focus on you and your alleged behavior in incurring the debt, since that is what usually determines whether debt can be written off or not. And there could be various kinds of motions, pre-trial hearings, and a full trial.

But for a very simple reason adversary proceedings rarely go through all these step and get to trial—the amount of money at issue usually does not justify the cost involved for either side to push the process that far.  So usually as soon as the two sides get a clearer picture of the facts—often involving nothing more than a few emails and letters between the two attorneys—there is usually a settlement. Often one side or the other sees that the facts are not as  good as it hoped and so that side sees that it needs to settle. The debtor may concede that his or her actions fit the legal standards to prevent the debt from being discharged. Or the creditor sees that it’s wasting its time and will dismiss the adversary proceeding. Most of the time there’s some give and take resulting in a sensible compromise and settlement.

In very rare cases, where there is either enough money at stake, or else one or both sides are unreasonable and insist on getting a decision from the judge (there is no jury), the dispute can go to trial. If so such trials usually last a half-day or a day, very seldom longer. At the end of trial the bankruptcy judge decides whether the debt is discharged or not.

It is Still a Relatively Quick Procedure

Because dealing with a creditor’s challenge can get expensive quickly, you hope to avoid getting one. But it may help to recognize that the bankruptcy court is a relatively fast and efficient forum for dealing with these because:

1) If a creditor does raise a challenge, the issues are narrow and so the fight is usually focused on just a few critical facts. Less facts in dispute makes for a more streamlined process.

2) Adversary proceedings move along fairly quickly. Compared to most state court and regular federal court litigation which often takes a couple of years, these kinds of adversary proceedings are often resolved in a matter of a few weeks, or very seldom more than a few months.

3) Bankruptcy judges deal with these kinds of challenges all the time, so they are extremely familiar with them. Compared to conventional trial courts where the judges often deal with complicated facts and a wide range of legal issues, adversary proceedings are quite straightforward.

Having a creditor object to the discharge of a debt can significantly complicate a Chapter 7 or Chapter 13 bankruptcy case. But these disputes are usually settled relatively quickly. You can help this happen by telling your attorney in advance about any threats to challenge your discharge told to you by any creditors. And then if a complaint is filed, work closely with your attorney to resolve it as quickly as possible.


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