Dealing with Very Aggressive Creditors Who Say You Can't Discharge Their Debts in Bankruptcy

Bankruptcy court is a relatively efficient place to determine whether or not you must pay a debt which the creditor says can’t be discharged.

 

One of the realities about filing a consumer bankruptcy case is that your case can get much more challenging if you have a very aggressive creditor. Most creditors take your bankruptcy filing in stride as a normal part of their business, figuring that you’re doing it for a sensible reason. But some creditors take it personally and react with more anger than good sense—often because they have some personal connection to you like an ex-spouse or former business partner. Or other more conventional creditors may honestly believe that they have grounds to prevent their debt from being discharged.

This blog, and the next one, are about what happens when there is such a creditor. The topic here is is not about creditors with rights to collateral, where the issues focus on what will happen to the collateral. It’s not about debts which will clearly not be discharged, like recent income taxes or child support obligations or most student loans. Rather this is about debts that would normally be discharged unless the creditor can prove that the debt arose of some bad behavior by you, usually involving some sort of fraud, theft, drunk driving, or such. Not just any bad behavior will do; it has to be one of a specific list that is in Section 523 of the Bankruptcy Code.

Creditors Have to Put Up or Shut Up

Before filing bankruptcy, you may be told by a creditor’s representative or collection agent that a debt can’t be discharged in bankruptcy or that they will fight you if you file bankruptcy. Most of the time they’re bluffing you. But for sure tell your attorney about the threat so that he or she can determine whether it has any merit. If it doesn’t, that will avoid unnecessary worry for you. In the unlikely event the threat does have merit, that will help your attorney prepare for a challenge by the creditor if it comes.

Even if a challenge has legal merit, a creditor may not pursue it for practical reasons, mostly to avoid putting out more money—in filing fees and attorney fees—to try to prove that you can’t discharge the debt, only to risk losing that battle and wasting its money. At least in theory the law has a “presumption” that your debts will be discharged, so the burden is on the creditor to show that a debt should not be.

And you don’t have to sit around wondering for long whether or not any creditor will raise a challenge. Except in very rare circumstances (such as forgetting to list the creditor in the bankruptcy documents), any creditor that has any objections to the discharge of its debt has only 60 days from your hearing with the trustee to formally file an objection or forever lose its opportunity to do so. Since that meeting (also called the “meeting of creditors” or “341 hearing”) usually happens about a month after your case is filed, this means that within about 3 months after filing you will know.

The “Adversary Proceeding”

The creditor may tell your attorney in advance about an intended challenge, usually in an effort to get you to settle the matter by agreeing to pay part or all of the debt. But much of the time the creditor just files a formal complaint at the bankruptcy court. This begins what is in effect a mini-law suit, called an adversary proceeding, focusing only on whether the creditor can prove the facts that the law requires for the debt to be excluded from discharge. This issue is usually NOT on whether you owe the debt in the first place—that’s usually assumed and admitted. Rather the issue would be whether, for example,  you incurred the debt by falsifying a credit application, by never intending to pay it through bounced checks, by coercing a relative to change their will on your behalf... behavior of this sort.

Please come back to the next blog in a couple days for the rest of the story about what happens in these adversary proceedings.

Here's What You Need to Know about the Discharge of Your Debts under Chapter 7

The point of filing bankruptcy is to get relief from your debts. So, when and how DO those debts get “discharged”—legally written off—in a regular Chapter 7 bankruptcy?

 

Here’s what you need to know:

1.      You WILL receive a discharge of your debts, as long as you play by the rules. Under Section 727 of the Bankruptcy Code, the bankruptcy court “shall grant the debtor a discharge” except in relatively unusual circumstances:

• If you’re not an individual!  Corporations and other kinds of business entities do not receive a discharge of debts, only human beings do.
• If you’ve received a discharge in an earlier case too recently. You can’t get a new discharge of your debts in a Chapter 7 case if:
  
  • you already received a discharge of debts in an earlier Chapter 7 case filed no more than 8 years before your present case was filed, or
  • you already received a discharge of debts in an earlier Chapter 13 case filed no more than 6 years before your present case was filed (except under limited conditions).
• If you hide or destroy assets, conceal or destroy records about your financial condition.
• If in connection with your Chapter 7 case you make a false oath, a false claim, or withhold information or records about your property or financial affairs.

2.      ALL your debts will be discharged, UNLESS a particular debt fits one of the specific exceptions. Section 523 of the Code lists those “exceptions to discharge.” I’m not going to discuss those exceptions in detail here, but the main ones include:

• most but not all taxes
• debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases
• debts which were not listed on the bankruptcy schedules on time
• money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship
• child and spousal support
• claims against you for intentional injury to another person or property
• most but not all student loans
• claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)                                                                                                                   

3.      A discharge from the bankruptcy court stops a creditor from ever attempting to collect on the debt. Under Section 524, the discharge order acts as a court injunction against the creditor from taking any action—through a court procedure or on its own--to “collect, recover, or offset any such debt.” If a creditor violates this injunction by trying to pursue a discharged debt, the bankruptcy court may hold the creditor in contempt of court and, depending on the seriousness of its illegal behavior, can require the creditor to pay sanctions.

I Just Got Sued by a Creditor . . . What Do I Do Now?

Getting a lawsuit filed against you by a creditor starts a very fast-ticking alarm clock. Don’t hit the snooze button on this one.

Here are the realities:

#1: Most conventional creditors don’t sue very quickly. So the fact you are being sued usually means you are in pretty serious financial trouble.

The vast, vast majority of debts that go into default don’t stay with the original creditors. They are assigned to collection agencies. Sometimes the creditor continues to own the rights to the debt, and the collection agencies just gets a percentage of what it collects. But much more often these days creditors sell all the rights to their non-performing debts to collection agencies, at a steep discount. The collection agency then pounds on you to pay the debt. It is often reluctant to sue you because doing so is relatively expensive, and requires putting out cash it may well never get back from you. Instead it will aggressively contact you and badger you into paying whatever it can get out of you for a period of time, and will then often turn around and sell the remaining debt to another collection agency, at an even steeper discount. Once a collector resorts to suing you, it’s admitting that getting money out of you by other means has not been working. That usually means that you truly can’t afford to pay the debt, and that it will only get money out of you if it is forcibly taken from you.

 

#2: Although you may feel powerless when you get served with a lawsuit, and are tempted to do nothing about it, that is almost never a good idea.

Collection agencies are not stupid. Your collector does not invest in the cost of a lawsuit unless it thinks it stands a good chance of getting a decent return on that investment—meaning your money in its pocket. A collection agency that makes too many wrong bets will soon be out of business. The ones that are in business know what they are doing. If you get sued, there’s a good chance the collector has its eyes on some specific target of yours that will get it paid—a paycheck to garnish, some real estate to put a lien on, or even a rich relative for you to beg from. The collector counts on your avoidance behavior so that it can get a judgment against you, and then to use the force of law to start grabbing your earnings and/or assets. Beat them at this game by finding out what they can and can’t do to you, and how you can protect yourself, preferably BEFORE they get their judgment,. Don’t let your creditors take advantage of you and your fear.  Most consumer or bankruptcy attorneys will give you a free consultation with honest advice about what’s best for you in your specific situation There’s no good reason not to find out your options and have a proactive game plan.

 

#3: Once you are served with a lawsuit, you have very little time to respond. If you don’t in time, you lose. The resulting default judgment is much more than simply an admission that you owe the debt.

Most collection lawsuits consist of a statement that you owe a debt, have not paid it according to its terms, and now owe the entire balance, plus ongoing interest, and the attorney fees and costs to bring the lawsuit. Most debtors’ reactions to this is, “yeah, I know I owe the money, so what’s the point of fighting it?” Here are some simple reasons you owe it to yourself to quickly see an attorney about the lawsuit, again preferably before the deadline expires and a judgment is entered against you.

a) You need to understand the consequences of the lawsuit, and your options for dealing with it. A lawsuit is a serious matter. You should not be flying blind about how it can affect you, and what you can do about it.

b) You may have defenses. Collection agencies routinely try to collect debts on which the statute of limitations has expired. They can sue the wrong person. It is worth having an attorney look over the paperwork for any such defenses.

c) You may have a counterclaim—an argument that the creditor did something wrong and owes you money for damages. These can be based on the creditor’s collection behavior, or the way the debt was entered into, and could result in a favorable settlement for you.

d) A lawsuit may include allegations beyond the usual ones about you owing the debt, which could restrict your options later. Once a judgment is entered, it is too late to deny the allegations upon which it is based.  The debt thus could become much more difficult to address in a future bankruptcy, for example.

e) Having an attorney review the lawsuit gives you the opportunity to think about it as part of your overall debt picture. Many consumers do not have an attorney who they can talk to on a regular basis. So problems accumulate and questions aren’t asked. That can lead to a tremendous amount of confusion and anxiety. Seeing an attorney about a pending lawsuit should lead to a discussion about how addressing it fits in with everything else going on in your financial life.  

Special Protection for Your Co-Signers Under Chapter 13

Chapter 7 protects you and your assets with the automatic stay. Chapter 13 goes a big step further by also protecting your co-signers and their assets.

The first three chapters of the Bankruptcy Code—chapters 1, 3, and 5—include code sections that tend to apply to all of the bankruptcy options. In contrast, the code sections within chapters 7 and 13 apply only to cases filed under those chapters. Because the automatic stay—your protection from collection by creditors that kicks in as soon as your bankruptcy case is filed—applies to all bankruptcy cases, it is found in one of the earlier chapters of the code. It’s in chapter 3, section 362.

But the very first section of chapter 13—section 1301—also deals with the automatic stay, and adds another layer of protection that only applies to cases filed under Chapter 13.

The core of section 1301 states that once a Chapter 13 case is filed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor.”

This means that a creditor on a consumer debt, who is already stopped by the general automatic stay provisions of section 362 from doing anything to collect a debt directly from the debtor, is also stopped from collecting on the same debt from anybody else who is co-signed or otherwise also obligated to pay that debt.

If you think about it, that’s rather powerful. You are given the ability to protect somebody—often somebody your really care about—who is not filing bankruptcy and so is not even directly in front of the court. The person being protected may not even know that you are protecting them from the creditor.

This “co-debtor” protection does have some important conditions and limits:

1. It applies only to “consumer debts” (those “incurred by an individual primarily for a personal, family, or household purpose”).

2. For purposes of this code section, income tax debts are not considered “consumer debts.” So spouses on jointly filed tax returns or business associates with whom you share a tax liability are NOT protected.

3. This protection does not extend to those who “became liable on... such debt in the ordinary course of such individual’s business.”

4. Creditors can ask for and get permission to pursue the otherwise protected co-debtor to the extent that:

(a)  the co-debtor received the benefit of the loan or whatever “consideration” was provided by the creditor (instead of the person filing the bankruptcy), or

(b)  the Chapter 13 plan “proposes not to pay such claim.”

5. This co-debtor stay evaporates as soon as the Chapter 13 case is completed, or if it’s dismissed (such as for failure to make the plan payments), or converted into a Chapter 7 case.

Choosing between Chapter 7 and 13 often involves weighing a series of considerations. If you want to insulate a co-signer or someone liable on a debt with you from any adverse consequences of your bankruptcy case, that is one consideration that will likely push you in the Chapter 13 direction because of the co-debtor stay.