When Can a Creditor Challenge the Dischargeability of a Debt in Bankruptcy Litigation?

In a bankruptcy case, many debts are dischargeable, including credit card debt, medical bills, utility bills, and personal loans. When a debt is discharged in bankruptcy, the debtor no longer has to pay it. However, a debtor’s right to have debts discharged in bankruptcy is not absolute. A creditor or the trustee can file an action asking the bankruptcy court to deny discharge of a specific debt. These actions are commonly referred to as non-dischargeability actions.

A non-dischargeability action is an adversary proceeding that takes place during the bankruptcy case. Adversary proceedings — also referred to as bankruptcy litigation — are separate actions within the bankruptcy case.

Non-Dischargeability Actions in Bankruptcy Litigation

There are very specific circumstances in which a non-dischargeability action can be filed. The reasons for requesting denial of a discharge are set forth in the U.S. Bankruptcy Code.

Generally, a creditor can file an adversary complaint in bankruptcy requesting the court deny a discharge of a debt if the debt was incurred by either actual or constructive fraud. Grounds for a non-dischargeability action include:

• The debtor used fraud or false pretenses or made a false statement about his or her financial condition in obtaining the debt.
• In issuing credit, the creditor relied on a false written statement about the debtor’s financial condition, which was made with the intent to deceive the creditor.
• The debt involved purchase of luxury goods or services worth more than $675 in aggregate during the 90-day period prior to filing of the bankruptcy.
• The debt arose from a cash advance or series of cash advances totaling more than $950 and was incurred within the 70-day period prior to the bankruptcy filing.
• The debt was incurred on account of the debtor engaging in fraud while acting as a fiduciary, embezzlement, or larceny.
• The debt resulted from the debtor causing willful and malicious injury to another person or another person’s property.

Basically, if the debtor made an intentional, fraudulent misrepresentation to obtain the debt, a non-dischargeability action can be filed. Examples of this type of fraudulent conduct include false statements by a debtor on a credit card or loan application. Luxury purchases and cash advances with the specified periods can also provide the basis for a non-dischargeability action.

In addition to requesting denial of discharge of a specific debt, there are very limited circumstances when creditors or the trustee can file an objection to discharge of all debts in a bankruptcy case. The circumstances generally involve fraud or other illegal activity in the bankruptcy case itself.

Process for Pursuing a Non-dischargeability Claim

Making the determination whether a specific situation warrants a non-dischargeability action requires analysis by an experienced bankruptcy litigation attorney. If legal counsel concludes that the circumstances justify filing an action, asserting the claim should also be handled by a knowledgeable bankruptcy litigator.

As with most lawsuits, the action begins with the filing of a complaint on behalf of the creditor in the bankruptcy court. The complaint must assert all the facts relating to the debt and the circumstances under which the debtor incurred or obtained it. That often includes alleging facts concerning the false statements about the debtor’s financial condition and the debtor’s intent in making them, as well as evidence about the creditor’s reliance on the statements.

The defendant can respond within a certain number of days. If no response is filed by the deadline, the plaintiff can obtain a default judgment. If a response is filed, the case will proceed through discovery and pre-trial processes. In the proceeding, the creditor has the burden of proving all the facts essential to establishing the grounds for granting the request to make the debt non-dischargeable.

Discovery can include interrogatories, document production, and depositions. At the end of the pre-trial process, the bankruptcy court will schedule a trial. A trial on a non-dischargeability claim is like any other court trial. It involves introduction of testimony and documentary evidence as well as cross-examination of witnesses.

As with any lawsuit, adversary proceedings in bankruptcy court can be settled by the parties before trial if mutually agreeable terms are reached by counsel for both parties. At the end of the trial, the judge will enter a ruling in favor of either the creditor or the debtor. If the creditor prevails after a trial, the debt will not be discharged by the bankruptcy, and the debtor will have to repay it.

Talk With an Experienced Twin Cities Bankruptcy Litigation Attorney About Challenging Discharge of a Debt in Bankruptcy

Asserting and proving a case for non-dischargeability of a debt requires bankruptcy litigation experience, skill, and knowledge. It also requires legal counsel with the ability to investigate the circumstances and obtain relevant documentary evidence relating to the debt.

In my practice at the Dave Burns Law Office, I represent both debtors and creditors in adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul. If you are a creditor and believe that the circumstances underlying a debt justify filing a non-dischargeability action, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul.