The purpose of filing for bankruptcy is often to wipe out (discharge) qualifying debt, such as credit card balances, medical bills, and personal loans. But even if a debt qualifies for a discharge, a creditor or the bankruptcy trustee can object to the discharge of a particular debt or the entire bankruptcy case by filing a motion or lawsuit called an adversary proceeding.
Read on to learn some reasons a creditor or trustee might request a denial of discharge, what the legal consequences are if the judge finds for the complaining party, and more.
Ways to Object to a Bankruptcy Discharge
A bankruptcy discharge cancels your obligation to pay back qualifying debts after your bankruptcy case ends. Creditors cannot legally collect a discharged debt from you. (Find out about the debts you'll remain responsible for in Nondischargeable Debts.)
If you'd like to dispute the debtor's right to a discharge, you'll need to file either an adversary proceeding (a type of lawsuit) or a motion, depending on the type of debt involved.
- When you'll file an adversary case. A creditor or the trustee will file a complaint in an adversary proceeding if the dischargeability issue involves a fraudulent act intended to deprive a creditor of payment. The fraudulent act can occur either before the bankruptcy case or as part of the bankruptcy filing. (11 U.S.C. §§ 523(a)(2), (4), (6); 727(a)(2)-(7).)
- When you'll file a motion. If the debtor received a discharge in a previous matter and isn't entitled to another, you'll object to the discharge using the motion process. (11 U.S.C. § 727(a)(8) or (9)). (Find out how often you can receive a discharge.)
You must file the objection within 60 days of the date of the 341 meeting of creditors (with some exceptions—consult with a bankruptcy lawyer). The deadline date will appear on the Notice of Chapter 7 Bankruptcy Case mailed out by the court.
Types of Objections Raised in an Adversary Proceeding
A creditor will usually object to the discharge of its particular debt when fraud or an intentional wrongful act occurs before the bankruptcy case. For instance, examples of nondischargeable debts, if proven, could include:
- The costs and damages caused by intentional and spiteful conduct. A typical example of this damage would be for repayment of repairs made to apartments or other rental properties after people move out.
- All charges on a credit card over a certain amount made within 90 days of filing for bankruptcy or cash advances taken on credit cards of over a certain amount made within 70 days of filing the case. (To find out the current amounts, see Recent Purchases for Luxury Items and Cash Advances.)
- Any damages or deaths caused while operating a vehicle while under the influence.
A creditor or the trustee can also object to the discharge of all debts involved in the case. This type of objection is common when the fraud is committed in connection with the bankruptcy, rather than before the filing. Examples include:
- perjury by providing false information on the bankruptcy petition and schedules
- transferring the title or property to another person to avoid including it in the bankruptcy
- destroying property or documents
- lying to the bankruptcy trustee or judge during hearings, or
- failing to obey a lawful order of the bankruptcy court.
The penalty for losing any fraud-related objection can be very severe. You could face dismissal of your bankruptcy case, repaying some or all of your debts, and possibly even criminal prosecution.
Fraud isn't always involved in an objection, however. Sometimes it isn't clear whether a debt fits within a nondischargeable category. In that case, a creditor might ask the court to weigh in on the dischargeability status of a particular debt. For instance:
- Priority debt such as alimony, back child support, court costs, fines owed to government institutions, and restitution can never be discharged, but it can be difficult to know whether a debt will be classified as such.
- Federal and state income taxes can be complicated because while they're often nondischargeable, it's not always the case and a judge might be needed to resolve a dispute. (For an overview, see Tax Debts in Chapter 7 Bankruptcy.)
(Learn more in What Types of Bankruptcy Cases Must Be Filed as an Adversary Proceeding?)
How an Adversary Proceeding Starts
The case starts with the filing of a written complaint (the document that initiates a lawsuit) that explains the specific reasons the party believes the debt isn't dischargeable.
Several parties could file an adversary proceeding, including:
- Creditors. Most objections to discharge are brought by creditors. Generally, a creditor will file an objection to the discharge of its debt only. Creditors assert many reasons a debt shouldn't be discharged, the most serious being that the debtor provided false statements or misleading information when filling out a loan application or financial statement.
- Chapter 7 bankruptcy trustee. The Chapter 7 trustee's job is to collect all assets for creditors and to allocate payment according to the priority payment rules. The trustee can object to the discharge of a particular debt or the discharge of all debts. The trustee will usually do this when the trustee suspects fraud, (hiding assets, transferring assets to another, or destroying assets).
- U.S. Trustee. The U.S. Trustee or Bankruptcy Administrator can object to the discharge of all of your debts. This might occur after a bankruptcy audit reveals an issue with information in the petition (you'll have an opportunity to prove the accuracy of the petition contents).
The parties will engage in discovery (a process that requires an exchange of evidence), and the judge will schedule a trial. If, after the trial, the judge finds for you, the debt will be discharged, and you won't have to repay it. If the judge finds for the person who filed the suit, your debt won't be discharged. You'll be required to repay the debt. Of course, like any lawsuit, you can settle the adversary proceeding before trial.