How do You Challenge a Debtor’s Right to Discharge in Bankruptcy?
A commercial bankruptcy proceeding often has a significant impact on the rights of creditors. In a Chapter 7 filing, for example, the debtor business is looking to liquidate, which means most unsecured creditors will get pennies on the dollar for what they are owed. This is because many debts are discharged under Chapter 7–i.e., the debtor is relieved of any legal obligation repay the creditor after any assets are liquidated.
There is no such thing as an absolute right to a discharge. The Bankruptcy Code only allows discharge of debt under certain circumstances. And the creditor has certain legal rights that must be respected. This includes the right to receive notice of the bankruptcy case and the right to file an objection to discharge with the court.
Here are four things to keep in mind if you are a creditor looking to stop a bankruptcy discharge:
Initiate an adversary proceeding.
Most Chapter 7 bankruptcies are initiated by the debtor. When a creditor objects to the discharge of a specific debt, the creditor needs to file a complaint with the federal bankruptcy court that has jurisdiction over the debtor’s petition. This complaint needs to be filed before the deadline specified in the notice sent to creditors. Once filed, the complaint initiates what is known as an “adversary proceeding,” or a lawsuit related to a pending bankruptcy petition.
Cite a specific reason for your objection.
The Bankruptcy Code provides a list of valid objections that justify denying a discharge. In commercial bankruptcy cases, one of the most common objections is that the debtor engaged in some sort of fraudulent act designed to avoid repaying the debt. This includes both fraudulent acts committed before and after the actual bankruptcy filing. For instance, if a debtor tries to hide assets from the creditor or the bankruptcy court, that would qualify as a fraudulent act. Similarly, if the debtor committed fraud in connection with obtaining the original debt–i.e., lying on a loan application–that would give the creditor grounds to object to discharge.
Understand your rights in a Chapter 11 case.
Chapter 11 differs significantly from Chapter 7 when it comes to commercial bankruptcy. In Chapter 11, the debtor is attempting to reorganize its business in order to keep the doors open while repaying any outstanding creditors over time. In a typical Chapter 11 proceeding, the debtor files a reorganization plan with the bankruptcy court. Any creditors whose contractual rights are affected by the plan then have the right to vote on it or file an objection. In some Chapter 11 proceedings there may be competing plans, in which case the creditors may vote on which one they prefer. If confirmed, the bankruptcy plan supersedes any prior contractual rights of the creditors–that is to say, it discharges the debtor from the terms of its pre-confirmation debts.
Speak with a qualified Dallas commercial bankruptcy attorney.
At Bennett, Weston, LaJone & Turner, P.C., we assist business creditors in asserting and protecting their rights in commercial bankruptcy cases. Remember, once a debtor files for bankruptcy, the court imposes an automatic stay that prevents creditors from taking any further collection action outside of the bankruptcy process. So, if you need assistance in dealing with the bankruptcy system, call our Dallas office today at (214) 691-1776 or toll-free at (888) 991-1776 to schedule an initial consultation.