Creditors’ Rights in a Bankruptcy Case

The United States Bankruptcy Code provides creditors’ rights in a bankruptcy case. Enforcing those rights requires moving expeditiously when a creditor becomes aware of the debtor’s bankruptcy petition. In some circumstances, a creditor may need to initiate an adversary proceeding within the bankruptcy case to protect their statutory rights. These proceedings are also referred to as bankruptcy litigation.

Creditor actions and claims in a bankruptcy case take various forms. Following is a summary of the primary rights commonly asserted by creditors in adversary proceedings within a bankruptcy case.

Non-Dischargeability Claims By a Bankruptcy Creditor

In some situations, creditors’ rights allow them to claim that a debt is not dischargeable in bankruptcy. If the creditor succeeds in the claim, the debt must be repaid regardless of the bankruptcy. A non-dischargeability action asserts a specific basis for the claim, typically involving intentional misconduct by the debtor amounting to actual or constructive fraud.

Section 523 of the Bankruptcy Code establishes the grounds for a non-dischargeability claim. They include debtor use of fraud or false pretenses (such as making false statements) in obtaining a debt; fiduciary fraud, embezzlement, or larceny; certain purchases or cash advances incurred immediately before filing bankruptcy; and willful or malicious injury to a person or property.

Asserting a non-dischargeability claim requires initiation of an adversary proceeding within the bankruptcy case. These proceedings are bankruptcy litigation and require representation by an attorney with specific experience in bankruptcy adversary proceedings. Many attorneys who assist with bankruptcy petitions do not handle separate litigation within a bankruptcy case.

Additional details about non-dischargeability claims are available in a separate blog article, When Can a Creditor Challenge the Dischargeability of a Debt in Bankruptcy Litigation?

Objections to Discharge

Section 727 of the Bankruptcy Code authorizes creditors to file an Objection to Discharge in a bankruptcy case. This type of action generally alleges that the debtor should not qualify for discharge on account of wrongful conduct by the debtor. The conduct often involves hiding assets, wrongful transfer, destruction, or manipulation of property that should have been part of the bankruptcy estate.

Fraudulent transfers could be a basis for an objection to discharge. These types of claims are very serious and can undermine an entire bankruptcy case. Representation by an experienced bankruptcy litigation lawyer is essential to maximizing the likelihood of success.

Challenging a Proposed Sale of Assets

The Bankruptcy Code authorizes a bankruptcy trustee or debtor in possession to sell or lease property in the bankruptcy estate under specific circumstances. A sale or lease under the provision must meet specific requirements. A creditor whose interest is affected by this type of action may have a basis to challenge a proposed sale or lease that does not meet the statutory criteria.

Like many types of bankruptcy creditor claims, a sale of assets case is complex and requires substantial legal and factual analysis, as well as presentation of detailed evidence in court. Challenging a sale of assets should only be undertaken with representation by a knowledgeable bankruptcy litigation attorney.

Defending Against a Trustee Avoidable Preference Claim

A bankruptcy trustee has authority to avoid certain transfers of interest or payments made to a creditor prior to filing of a bankruptcy petition. The statutory provision is referred to as the clawback provision of the Bankruptcy Code.

Creditors’ rights allow them to challenge a trustee clawback under the avoidable preference statutory provisions. The challenge results in avoidable preference litigation within the bankruptcy case. This type of action requires representation by a bankruptcy litigation attorney who understands the Bankruptcy Code and the detailed requirements of trustee clawback actions.

Additional details about this type of action are provided in a separate blog post, Avoidable Preference Litigation in Bankruptcy Cases.

Automatic Stay Relief Motions

The filing of a bankruptcy petition imposes an automatic stay of most actions against the debtor and the debtor’s property. However, a creditor may be able to request that the bankruptcy court grant the creditor relief from the stay, if the creditor can demonstrate cause for the relief.

Secured creditors may wish to ask relief from the automatic stay in circumstances where particular property is not adequately protected, or if the debtor has no equity or the property is not insured. Getting a stay does not remove the property from the bankruptcy estate or grant the creditor ownership of the property.

The creditor who gets relief from the automatic stay can only proceed as permitted by the bankruptcy court’s order. Under any circumstances, proving cause for relief from an automatic stay and obtaining an order that benefits the creditor is best accomplished through representation by an experienced bankruptcy litigation attorney.

Talk With an Experienced Minnesota Bankruptcy Litigation Attorney

At the Dave Burns Law Office, I assist and enforce creditors’ rights in bankruptcy cases in the United States Bankruptcy Courts in Minneapolis and St. Paul. Bankruptcy litigation is a primary focus of my practice.

If you consider filing any type of adversary proceeding or litigation in a bankruptcy case, I welcome you to contact me at (612) 677-8351 or by sending an email to me at dave@daveburnslaw.com. I am available to meet with clients in both Minneapolis and St. Paul and welcome inquiries from clients and referring attorneys throughout the State of Minnesota.