Learning About The Process Of Filing Bankruptcy

How To Prevent A Debtor From Discharging Debt Owed To You

8 April 2015 by Evelyn Perkins

While chapter 7 bankruptcy offers people struggling with debt a way to get a fresh financial start, that often means creditors who loaned them money must absorb the losses. While large companies can afford to write off unpaid debts, this isn't always true for small businesses or individuals who are owed money by the debtor, especially if the money was obtained by debtor fraudulently. If you want to prevent a bankruptcy petitioner from getting debts the person owes you discharged, here's what you need to do.

Petitioning the Court to Prohibit Discharge of Certain Debts

Some debts are immune to being discharged through bankruptcy such as:

• Taxes
• Tax liens
• Student loans
• Debts incurred via fraud or under false pretenses
• Domestic support obligations such as child support
• Debts associated with willful and malicious acts or injuries
• Governmental fines and penalties
• Judgments associated with wrongful death or personal injury lawsuits where the person operated a vehicle while intoxicated
• Fees and assessments related to condominiums or cooperative associations
• Debts not listed on the bankruptcy schedules

Any debts not listed here such as personal loans can potentially be discharged via bankruptcy. The only way to prevent a dischargeable debt from being wiped out during the proceedings is to make it non-dischargeable by filing an adversarial action called a non-dischargeability complaint. If successful, the person will be required to pay the disputed amount even if other parts of the same debt are discharged.

For example, say a person takes out a $1,000 cash advance on a credit card in the 70 days leading up to the individual filing bankruptcy. This is not allowed based on bankruptcy law. If the creditor successfully disputes the dischargeability of the cash advance, the debtor will be held responsible for repaying that $1,000 cash advance even though the rest of balance on the card may be wiped out by the bankruptcy.

The action can be filed anytime after you receive notice the debtor has filed bankruptcy and before the case is discharged. However, it's best to file the action as early as possible because you and defendant will be required to present your sides of the issue at a trial and that can take a while conclude.

Valid Reasons for Challenging the Dischargeability of a Debt

To successfully have your dischargeable debt converted into a non-dischargeable one, you must present the court with a valid reason why it should grant your request. The grounds you can use to challenge the debt's classification are:

• The person obtained the debt via fraudulent means or by misrepresenting his or her financial condition (e.g. lied about income on a credit application)
• The person incurred the debt by purchasing luxury goods or services in excess of $650 total during the 90 days prior to filing for bankruptcy (e.g. using a credit card to rent a yacht)
• The person took out cash advances in excess of $925 total within the 70 to 90 days prior to filing bankruptcy
• The person obtained the money through embezzlement, larceny, or other fraudulent means while working in a fiduciary role (e.g. a partner in a business embezzles money from the company)
• The person incurred the debt as a result of causing willful and malicious damage to another person's property or injury to an individual

So for example, if the person lied to you about having a job and you relied on that information when deciding whether or not to give them a loan, you could dispute the discharge of the debt based on the person's misrepresentation of that key fact.

Litigating Your Case

When you file the non-dischargeability complaint with the court, you'll need to also send notice of the action to the debtor. You can do this through the mail by sending it to the address the person listed with the bankruptcy court.

Once this has been accomplished, the court will set a date for a pre-trial conference where the judge will determine if both parties are ready to go to trial. If a motion for summary judgment has been filed, the judge will consider if he or she can make a ruling at that time. If not and the case is deemed ready, a trial date will be set where you and defendant can present your cases before a judge who will make a decision regarding the dischargeability of the debt in question.

During the time after notifying the defendant and before the pre-trial conference, you'll need to gather together evidence supporting your case. You're allowed to perform what's called discovery at this time. This is a process that allows you obtain additional information from the defendant that may help your case. This method allows you to submit written questions to the debtor, request documentation, have documents inspected for validity, and depose the defendant and his or her witnesses. Take full advantage of the discovery process to strengthen your case.

It can be challenging filing this type of adversarial action, so it's best to work with a chapter 7 bankruptcy attorney to develop a strategy to help obtain the outcome you want. Click here to get started.

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