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Contesting Dischargeability

Do I Need To File An Adversary Proceeding To Protect My Claim?

Some kinds of claims against an individual debtor survive the discharge without the creditor having to do anything to protect the claim. Examples are child support, student loans, criminal restitution and judgments arising from drunk or impaired driving.

Other kinds of claims survive the bankruptcy only if the creditor takes action in the short time allowed.

A creditor whose claim against the debtor was incurred by fraud, dishonesty or other forms of intentional “bad acts” or which is a nonsupport claims that arose in a divorce may contest the discharge if his claim in a Chapter 7 bankruptcy by filing a timely nondischargeability suit and proving to the satisfaction of the court that the elements for nondischargeability are met. These adversary proceedings must be filed within 60 days of the first meeting of creditors or the claim is discharged.

If you hold a prebankruptcy judgment for fraud against the debtor, that judgment may be conclusive in an action for nondischargeability in the bankruptcy court. You still need to file the nondischargeability action, but you may not have to prove anything more than the existence of your judgment.

Debts arising in divorce: When a divorce or separation agreement of judgment creates a debt in favor of the former spouse, those nonsupport obligations to the former spouse may be excluded from the Chapter 7 bankruptcy discharge. 11 U.S.C. 523(a)(15).

The creditor spouse doesn’t have to prove fraud or dishonestly. He or she must prove that discharge of debt creates a greater hardship on the creditor spouse than excluding the debt from discharge would create for the debtor spouse.

These nonsupport, marital debts are nondischargeable only if the creditor/spouse files an adversary proceeding within 60 days of the first meeting of creditors.

Should I File A Nondischargeability Action?

Before spending time, money and emotional energy in contesting the discharge of your claim in the debtor’s bankruptcy, you need to ask yourself some hard, real-world questions about why you might contest dischargeability. Consider:

  1. What is the likelihood that the debtor will have assets or income in the future from which your claim could be paid, if you were successful in excepting the debt from discharge? If the debtor is older, has low skill or is discredited in his field of endeavor, or if the debtor is subject to other substantial nondischargeable claims such as taxes, the chances of recovering money after the bankruptcy to pay your nondischargeable claim are questionable.
  2. What are the costs of litigating the nondischargeability action? How do those estimated costs compare to the size of the debt you want to collect? What is the risk that won’t prevail?
  3. Did the dishonest or malicious act create the debt or did it occur after you extended credit? Generally, to prevail, you must show that for the dishonest act, the debt would not have arisen. Lies about intent to repay the debt, made after the debt was incurred, usually won’t support a nondischargeability action.

Remember too that corporations don’t get a discharge of their debts in bankruptcy. The assets of the debtor corporation are simply liquidated to pay creditors. So, the concept of “nondischargeability” is meaningless in a corporate bankruptcy case.

The presumptions in nondischargeability actions generally favor the discharge of the debt except perhaps in the case of debts arising from divorce. Consider the costs versus benefits before spending substantial time and energy contesting the discharge of a particular debt.

Nondischargeability And Claims In The Bankruptcy Estate

If there will be a distribution in the case, whether your claim is nondischargeable or not, you must file a proof of claim to share in the distribution. Get the proof of claim form and file with the court within the time set in the notice.

We encourage you to call 515-421-9068 or use our online contact form to schedule a free one-hour consultation with a lawyer who emphasizes clear communication and cost-efficient solutions. We will review your situation and recommend an effective course of action.