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CREDITOR'S RIGHTS IN BANKRUPTCY
What do the Creditors do when I file for Bankruptcy? Who pays them? Does
the Government pay them or must they simply write off the loss? These are
common questions I get from clients. Creditors do have rights when you file a
Bankruptcy petition. They could ask the Court to oppose your getting a Discharge
of your debt. Creditors have other alternatives for responding to a bankruptcy.
Unfortunately they often "throw in the towel" upon learning a
bankruptcy has been filed. A brief investigation of the case is all that is
needed to find options for preserving a creditor's rights and interests.
The following discussion focuses on the most common methods for dealing with a
consumer bankruptcy. These topics also apply to business cases. However, due to
the complex nature of chapter 11 bankruptcy matters, a number of options for
responding to business bankruptcies are not be explored here. Creditors in such
matters should seek the advice of counsel.
Objection to discharge
In a chapter 7 case the debtor is trying to discharge as much debt as possible.
A creditor may seek a judgment to except his debt from the discharge by filing a
nondischargeability complaint with the bankruptcy court.
Generally, the debt in question falls into one of several categories:
1. the debt was obtained through fraud on the part
of the debtor;
2. the debtor embezzled assets or breached his
fiduciary duty to the creditor; or
3. the debtor is liable for willful and malicious
injury to the creditor or his property.
These debts are discharged unless the creditor timely files a complaint
(objecting to discharge) on or before 60 days from the first date set for the
creditor's meeting. In other words a creditor only has about 90 days after the
bankruptcy is filed to take action.
An objection to discharge in a Chapter 7 is a complaint filed in the bankruptcy
court by a creditor against an individual [only individuals may receive a
discharge]. If the creditor is successful, the debtor is denied a discharge of
all debts owed at the time of the bankruptcy petition.
There are several grounds for objecting to a debtor's discharge, including:
1. the debtor failed to keep and produce adequate
financial records;
2. the debtor failed to explain satisfactorily a
loss of assets;
3. the debtor made a materially false statement in
his bankruptcy papers;
4. the debtor failed to obey a lawful order of the
bankruptcy court; or
5. the debtor fraudulently transferred, concealed,
or destroyed property that would have been property of the estate.
The complaint must be filed on or before 60 days from the first date set for the
creditors meeting in the bankruptcy. Typically, a creditor has about 90 days
after learning of the bankruptcy case to file the complaint. With such a short
time period, a creditor must act promptly to learn if grounds exist to file an
objection to discharge.
Relief from the Automatic Stay
When a bankruptcy petition is filed, an automatic stay goes into effect without
the need for judicial action. It stops all actions against a debtor with some
limited exceptions. However, if a lawsuit was pending, or if a foreclosure or
eviction was about to occur, a creditor may have grounds to request relief from
the automatic stay. This is the most common motion filed by creditors. The
motion is most often based upon "cause," which may include a lack of
adequate protection for the creditor or where the case was filed in bad faith.
Depending upon the facts of a particular case, there may be other grounds to
lift the automatic stay.
Repetitive Chapter 13 Petitions
Chapter 13 is a voluntary proceeding filed by individuals who want to reorganize
their finances --- usually to save a home from foreclosure. The debtor submits a
plan to repay his debts. A chapter 13 solves pre-petition financial
difficulties, but cases are often dismissed when a debtor suffers post-petition
financial problems and is unable to meet the obligations of his Chapter 13
repayment plan.
A debtor can file another case by showing a material change in circumstances
after the prior case. Creditor's (especially mortgage and vehicle financing
companies) and the Chapter 13 Trustee pay particular attention to
repetitive filings for possible abuses of the Chapter 13 system. Creditor
participation is important to stop the cycle of repetitive cases. In most
instances of repetitive abusive Chapter 13 filings, the Court will take action
to stop the serial petitions by prohibiting another filing for 180 days for
example..
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