If a creditor challenges the dischargeability of one of your debts in bankruptcy, should you hire a lawyer to help you defend against the challenge? The answer depends on a number of factors, including:
- the reasons for the creditor's challenge (in cases based on certain types of reasons, if you win the court will award you attorney's fees)
- the amount of the debt, and
- your chances of winning.
Nondischargeability Complaints in Bankruptcy
There are certain debts that you cannot discharge (wipe out) in bankruptcy regardless of whether the creditor challenges it or not. (Learn more about nondischargeable debts in Chapter 7 bankruptcy.)
There are other debts (like credit card debt and medical debt, to name a few) that bankruptcy will wipe out. However, sometimes a creditor will challenge the discharge a debt that you would normally be able to eliminate in bankruptcy. In order to challenge one of these debts, the creditor must file a complaint (called an adversary proceeding) in your bankruptcy and prove to the court that your debt should not be discharged. (Learn more about nondischargeability complaints in bankruptcy.)
Common Reasons Creditors Challenge the Dischargeability of Debts
The following are some of the most common reasons a creditors challenge the discharge of a debt:
- You obtained the debt through fraud, false pretenses, false representation, or a false written statement about your financial condition.
- You used the debt to buy over $650 in luxury goods or services (goods and services that are not necessary for your support or maintenance) in the 90-day period before your bankruptcy. (Learn about when credit card charges may be nondischargeable.)
- You took out over $925 in cash advances in the 70 days prior to filing for bankruptcy. (Learn about when cash advances may not be dischargeable.)
- You incurred the debt because you committed fraud while acting as a fiduciary or while committing larceny, or embezzlement.
- The debt arose out of your willful and malicious injury to another person or another person’s property.
What Happens If You Don’t Respond to the Creditor’s Complaint?
If a creditor challenges the dischargeability of one or more of your debts, the court will often declare the debt nondischargeable unless you respond to the complaint. Because an adversary proceeding is essentially a lawsuit within your bankruptcy case, you must be familiar with federal bankruptcy laws, procedures, and discovery rules in order to defend against it. (Learn about the procedures involved in defending a nondischargeability complaint.)
The Court May Award You Attorney's Fees If You Win
If a creditor challenges the discharge of a consumer (nonbusiness) debt, and you win, the bankruptcy court can award you attorney's fees and lawsuit costs if the creditor’s complaint alleged one of the following:
- you used fraud, false pretenses, false representation, or a false written statement about your financial condition to obtain the debt
- you used the debt to purchase luxury goods or services in excess of $650 in the 90 days before your bankruptcy, or
- the debt is comprised of cash advances exceeding $925 in aggregate that you obtained during the 70-day period prior to filing for bankruptcy.
However, the creditor won't have to reimburse you for attorney's fees and costs if it can prove that:
- its position was substantially justified, or
- there are other special circumstances that would make the award unjust.
Should You Hire an Attorney If a Creditor Challenges Your Discharge?
If a creditor challenges your discharge, it's often a good idea to get an attorney, but not always. Sometimes your circumstances don't justify the cost of hiring an attorney.
Does the Amount of Debt Justify Hiring an Attorney?
There is no guarantee that you'll recover your attorney's fees and costs from the creditor. If you don’t win the adversary proceeding or satisfy all other requirements, you'll be on the hook for your attorney's fees and court costs.
If the debt is small, you might not want to risk hiring an attorney and ending up with a significant amount of attorney's fees. Instead, you might be able to negotiate a compromise (such as agreeing that only a certain portion of the debt will be nondischargeable) on your own and avoid the risks involved in litigation.
On the other hand, if the debt is large and you have a good chance of winning, it will probably be worthwhile to hire an attorney to argue your case in court or negotiate a settlement on your behalf.
How Strong Is Your Case?
If you have a good chance of success in the creditor’s nondischargeability action, it will often be in your best interest to hire an attorney if:
- the court will likely award you attorney's fees and costs, or
- the debt is large enough that you will save more by discharging it even if you have to pay your own attorney's fees.
If your case isn’t very strong, it will often be better to negotiate a quick compromise with the creditor rather than take the matter to trial. In this situation though, you might consider hiring an attorney to help you negotiate a good settlement.
Talk to an Attorney to Learn About Your Options
If a creditor objects to your discharge, it’s always a good idea to talk to a knowledgeable bankruptcy attorney to learn about your options. An attorney can usually tell you how strong your position is and which course of action will be in your best interest. In addition, the attorney may be able to quote you a fee and provide you with payment options that minimize your risk. (Learn more about how to find a bankruptcy attorney.)