Creditor Rights in Bankruptcy

Creditors do have rights when a Bankruptcy petition is filed. They could ask the Court to oppose the Debtor’s Discharge of the debt.
Options are available in preserving a creditor’s rights and interests.

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;
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 the debts which must be approved by the Chapter 13 Trustee in a confirmation proceeding. 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.

Our firm has extensive experience in representing secured creditors in protecting and enforcing their rights, interests and remedies, both inside and outside of insolvency proceedings. We have represented secured creditors in real and personal property foreclosures and have successfully represented secured creditors in replevin actions involving many types of collateral. We also have significant expertise in defending secured creditors in litigation, including traditional lender liability claims, fraudulent transfer and preference litigation.