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Archive for the ‘adversary proceeding’ tag

Prevent Fraud Challenges on a Credit Card Debt

October 12th, 2020 at 7:00 am


Very recent credit card purchases and cash advances can be a problem when filing bankruptcy. Smart timing can mostly solve this problem.

Last week’s blog post introduced the so-called “presumptions of fraud” in bankruptcy. Today we get into dealing with this issue through smart bankruptcy timing.

Bankruptcy Timing to Avoid the Presumption of Fraud

Here’s the key point: you greatly increase the risk that you’ll still have to pay a credit card debt if you file bankruptcy too soon after incurring that debt. You risk still having to pay the purchase(s) and/or cash advance(s) recently incurred. You may still have to pay that part of that credit card debt in spite of bankruptcy.

But you can avoid much of that risk by timing your bankruptcy right. The presumptions of fraud are in effect for only a relatively short period of time after you make the purchase or cash advance. You avoid the presumption of fraud simply by filing bankruptcy after that short period of time has passed.

The Presumption Period for Credit Card Purchases

The presumption period of time for purchases is 90 days from the time of each purchase. It only applies if the purchase(s) made within that 90-day period exceed(s) $725. (U.S Bankruptcy Code Section 523(a)(2)(C)(i)(I), with that $725 dollar amount valid from 4/1/19 through 3/31/21.)

So what happens if you file bankruptcy within 90 day after making a large enough credit card purchase(s)?

Maybe nothing bad would happen. The creditor may not challenge the discharge (legal write-off) of the debt on that purchase. Then bankruptcy would discharge that debt regardless when you made that purchase.

Or the creditor could challenge the discharge of that recently incurred portion of the debt. It could assert that you made the purchase within the 90-day presumption period before filing. The creditor could make this challenge in one of two ways.

First, it could contact your bankruptcy lawyer about its intent to raise this challenge. Or second, the credit card creditor could make the challenge directly in bankruptcy court. It would have its lawyer file a narrowly-focused legal proceeding asking that the debt not be discharged.

Your Response with Contrary Evidence

Either way, then you’d have a chance to push back. Just because your purchase(s) fall within the 90-day presumption period does not necessarily mean you’ll have to pay the debt. Remember that the whole debt is usually not at issue, only the purchase(s) made during the 90-day presumption period.

Beyond that, the presumption is just that and no more. It’s an initial presumption that you did not intend to pay the debt when you made the purchase. When you incur a debt you are promising to pay it. If you incur that debt without intending to pay it, the law treats that as a fraudulent misrepresentation. The law presumes that if you made a purchase within the presumption period you didn’t intend to pay it. The creditor can and likely will win on that presumption if you don’t push back.

But you can push back. You can respond, with your bankruptcy lawyer’s assistance, that you actually did intend to pay the debt on the purchase(s). First, you can simply testify that your honest intention at that time was to pay that debt. Then you can back that up perhaps by saying you were not intending to file bankruptcy at that time. You didn’t decide to file and write off the debt until after you made those purchases. You can even bring up what event(s) pushed you into deciding to file bankruptcy after making the purchases. (This all of course assumes that these facts are true.)

In other words, you can defeat the presumption of fraud with evidence of no fraud.

Then the creditor may be convinced and could back down completely, and withdraw its challenge. Or it can negotiate a settlement, with both parties agreeing that you pay something, less than the amount the creditor wanted. Or, both sides could stand fast and have the bankruptcy judge decide whether and/or how much you would pay.

The Presumption Period for Cash Advances

The presumption of fraud for recent cash advances works the same way as with recent credit card purchases. There’s just a tweaking of the details. The presumption period of time for cash advances is 70 days from the time of each cash advance. (Not 90 days.) It only applies if the cash advance(s) made within that 70-day period exceed(s) $1,000. (Not $725.) (Bankruptcy Code Section 523(a)(2)(C)(i)(II), with the dollar amount valid from 4/1/19 through 3/31/21.)

Everything stated above about how the credit card presumption of fraud for purchases works applies to cash advances too. Most importantly, the creditor has to raise the presumption or else it has no effect. And if the creditor does so, you still have the opportunity to refute and defeat the presumption. That is, you and your bankruptcy lawyer can present evidence that you had intended to pay the debt at the time you made the cash advance(s).

Bankruptcy Timing and These Presumptions of Fraud

Besides being able to defeat these two presumptions of fraud, you can usually avoid them altogether. You do so by waiting to file bankruptcy past the 70- and 90-day presumption periods.

Sometimes waiting is easy. But in many circumstances time is not on your side. You are   with pressure from creditors. You may have received a summons and complaint from a creditor. You may have your paycheck being garnished. Or you may have a vehicle at the risk of repossession or a home at risk of eviction or foreclosure.

Also, while you’re waiting to file bankruptcy bad things can happen that you don’t expect. The IRS or state tax authority may record a tax lien. A creditor lawsuit you don’t even know about could turn into a judgment against you. A creditor may try to take some other unexpected action against you or your possessions.

Deciding whether to delay filing bankruptcy to get past a presumption period is a balancing act requiring legal advance. It usually involves balancing several considerations and then making an informed choice about your best timing. You really cannot make the best judgment call on this without a bankruptcy lawyer’s thorough knowledge and experience.  

Beyond the Presumptions to Regular Fraud

Another reason that legal advice is necessary is that the presumptions of fraud are not the end of the story. The presumptions are a tool that gives credit card creditors a modest advantage. But creditors can certainly raise fraud and misrepresentation-based challenges without that advantage. This applies to credit card creditors and essentially all creditors. If a creditor believes that the facts bear this out, it can try to argue that you incurred its debt with bad intentions of various sorts. This can happen regardless that the debt was incurred longer than 70 or 90 days before your bankruptcy filing.

Without getting into this more here, the point is that avoiding the presumption periods doesn’t necessarily mean you’re safe. A person could certainly make a credit card purchase or cash advance 6 months before filing bankruptcy with no intent to pay that debt. Or whenever. If a creditor believes that you incurred a debt under fraudulent circumstances, whenever that happened, the creditor could raise a challenge.

Rest assured that these challenges—with or without the presumptions—do not happen in most bankruptcy cases. Your lawyer will help you anticipate any such challenges. Then he or she will give you advice to prevent and, if necessary, defeat any such challenges.


Bankruptcy Can Write Off a Student Loan, IF it Causes Undue Hardship

March 18th, 2019 at 7:00 am

Writing off student loans is not easy. You must convincingly show that paying the loan causes you undue hardship, a tough condition to prove. 



Criminal fines and restitution and child and spousal support are types of debts that bankruptcy essentially never discharges. Income taxes can be discharged but only after meeting certain conditions. We’ve covered these in our last few blog posts. Today we cover student loans.

Student loans are more like income taxes than criminal or support debts in that they CAN get discharged in bankruptcy. Like an income tax, a student loan just needs to meet certain conditions.

But unlike an income tax debt, the conditions for discharge of a student loan are much vaguer. Most of the income tax conditions are clear. These conditions require a precise understanding of the law and a thorough knowledge of the facts of your case. But if you and your bankruptcy lawyer are careful, you should know before you file your bankruptcy whether you can discharge a tax debt.

Discharging student loans, in contrast, require meeting an ambiguous condition called “undue hardship.” Its ambiguity means that it’s much harder to predict whether or not a student loan will be discharged in bankruptcy.

Furthermore, because of this vague condition it’s possible to get a partial discharge. You may continue to owe some but not all of a particular student loan debt. Or if you have multiple student loans you may discharge some but not all of them.

“Undue Hardship”

Bankruptcy law states that an educational loan or benefit overpayment is not discharged in bankruptcy unless it “would impose an undue hardship on [you or your] dependents.” Section 523(a)(8) of the U.S. Bankruptcy Code.

Can you show the bankruptcy court that paying a student loan causes you “undue hardship”? If so bankruptcy can forever discharge that debt.

A More Precise Meaning of “Undue Hardship”

How does your bankruptcy court decide whether or not a student loan causes you a hardship?  

How bad does a hardship need to be to qualify as an undue hardship?

In most parts of the country “undue hardship” requires you to establish all three of the following:

1. You currently cannot maintain even a minimal standard of living (for yourself and any dependents) if you pay the student loan.

2. This present financial situation is realistically anticipated to continue through the loan’s term of repayment.

3. You have acted responsibly in the past regarding the student loan, by making a serious effort to pay it and/or to attempt to qualify for any of the available programs to reduce or manage the loan.  

The Student Loan Survives Unless You Establish “Undue Hardship”

It can be difficult to meet all three of these. If you don’t, you continue to owe the student loan.

Furthermore, the student loan creditor does not have to take any action itself. You and your lawyer have to raise the issue yourself. It’s up to you to start the ball rolling.

Generally you do so by filing an “adversary proceeding” during your bankruptcy case. This is a legal proceeding focusing exclusively on whether you qualify for a “hardship discharge” of the student loan.

If you believe you qualify, you could file a Chapter 7 “straight bankruptcy” case. Then your lawyer would file an adversary proceeding during the 3-4 months a basic Chapter 7 case usually lasts.  The student loan creditor would most likely object. There would then be a trial with evidence on whether you meet the necessary factors to show undue hardship. There’s no jury—the bankruptcy judge decides.

You can do the same thing within a Chapter 13 “adjustment of debts.” Because this kind of bankruptcy usually lasts 3 to 5 years, it gives you more timing options. Chapter 13 would usually allow you to avoid making student loan payments at least temporarily. Then once you think you qualify for undue hardship your lawyer would file the adversary proceeding. This could be especially helpful if you have a deteriorating medical condition or an anticipated reduction in income.


Student loans are dischargeable in bankruptcy, but undue hardship is an ambiguous and often tough condition to prove. The law of undue hardship as interpreted by the courts is constantly adjusting, and can be slightly different in different bankruptcy courts. So it’s crucial to get highly competent legal advice about what’s best for you.


Debts Not Written Off in Bankruptcy

February 18th, 2019 at 8:00 am

Most debts get written off—discharged—in bankruptcy. The only ones that aren’t are specifically listed in the Bankruptcy Code. 


Debts Covered by the Discharge

The basic rule is that all your debts get discharged in bankruptcy unless a particular debt fits a listed exception.

Focusing on Chapter 7 “straight bankruptcy,” you will likely receive an Order of Discharge within about 4 months of filing the case. The heart of this court order simply states that “A discharge…  is granted to [the debtor].”

So what are the listed exceptions—what debts are NOT discharged through the Order of Discharge?

Exceptions to Discharge

 Section 523 of the Bankruptcy Code covers “Exceptions to discharge.” There are two categories of exceptions:

1) debts which will still be discharged unless the creditor objects and prevails in that objection, and

2) debts which do not require objection by a creditor.

1) Debts Requiring Successful Creditor Objection

In this first category, “the debtor shall be discharged for [the] debt of a kind specified” “unless, on request of the creditor… , the [bankruptcy] court determines such debt to be excepted from discharge… .” Section 523(c)(1) of the Bankruptcy Code.

In other words, these kinds of debts DO get discharged unless ALL of the following are true:

  • the debt is “of a kind specified”
  • the creditor  requests a court determination
  • the court determines in favor of the creditor that the debt should be “excepted from discharge”

There are 3 kinds of debts of this sort in which a creditor can ask for a court determination about discharge of the debt:

  1. Fraud Debts: incurred when a debtor makes a misrepresentation or commits fraud to get a loan or credit. Section 523(a)(2).
  2. Theft, Embezzlement, Fraud in a Trust Relationship: stealing from anyone, such as an employer or business partner, and especially from someone in a fiduciary relationship. 523(a)(4).
  3. Willful and Malicious Injury: intentionally and maliciously harming a person or business, and/or property. 523(a)(6).

Timely and Successful Objection

How does a creditor ask for a court determination that a debt falls within one of these 3 kinds? It files a formal “adversary proceeding”—a type of limited lawsuit—in the bankruptcy court. It has to file this within a strict deadline—usually within 60 days after a scheduled meeting of creditors. If the creditor received appropriate notice of the bankruptcy case but doesn’t object by this deadline, the debt is discharged forever.

And if a creditor does timely object, how does the bankruptcy court decide whether a debt should get discharged? Unlike most lawsuits on a debt, the court does NOT need to determine whether the debtor owes the debt. THAT’s generally assumed. Rather the question is whether the facts support the narrow grounds of fraud and such which make the debt not dischargeable. If the creditor cannot prove the necessary facts, the debt will still be discharged.

2) Debts Not Requiring Creditor Objection

The kinds of debts that are discharged unless a creditor objects generally involve some bad action by a debtor towards the creditor. The general idea is that if a creditor cares about being wronged it will raise an objection to the discharge.

But in a second category of not-discharged debts the creditors do not need to object. That’s because the kinds of debts in this category are not dischargeable simply because of the nature of the debt. There doesn’t need to be a court determination. It’s usually quite straightforward whether or not the debt belongs to these nondischargeable types of debt.

Here’s a list of debts that don’t get discharged even without creditor objection:

  1. Criminal fines, fees, and restitution
  2. Income taxes, and other forms of taxes, under certain conditions
  3. Child and spousal support
  4. Student loans that don’t cause an “undue hardship”
  5. Claims for bodily injury or death from driving while intoxicated
  6. Debts not listed in your bankruptcy schedules, under certain conditions

There ARE occasionally questions about whether the debt at issue fits the not-discharged definition. But it’s usually clear whether a debt is, for example, a criminal fine or child support. Our next 6 blog posts will go through each of these types, focusing on situations where there may be some ambiguity.

Note: Today’s blog post was about the discharge of debts in a Chapter 7 case. The debts discharged in a Chapter 13 case are slightly broader. We’ll address the difference in an upcoming blog post.  

The Surprising Benefits: Fraud Debt Collections in Bankruptcy

July 16th, 2018 at 7:00 am

Being accused of defrauding a creditor is unusual in consumer bankruptcy cases. A creditor would have to jump through significant hoops. 


Most Debts are Discharged (Permanently Written Off) in Bankruptcy

The federal Bankruptcy Code has a list of the kinds of debts that are not discharged. This list details the conditions under which these kinds of debts don’t get discharged. (See Section 523 on “Exceptions to discharge.”)

Essentially, all your debts get discharged unless any of them fit one of the listed exceptions.

The Fraud Exception

One of the most important exceptions to discharge is the one stating that debts, “to the extent obtained, by… false pretenses, false representation, or actual fraud,” might not be discharged. (Section 523(a)(2)(A) of the Bankruptcy Code.)

This is an important exception to discharge because it could apply to many different kinds of debts. The other exceptions to discharge apply to very specific categories of debts. For example, these other exceptions include child and spousal support, various taxes, and student loans. But the fraud exception could apply to just about any debt if it was incurred in a fraudulent way.

What Makes for a Fraudulent Debt?

Your creditor would have to demonstrate that its debt should not be discharged because you incurred that debt fraudulently. If the creditor fails to do so the debt WILL get discharged and you’ll no longer legally owe it.  

To avoid discharge of the debt, the creditor would have to present evidence and prove EACH of the following:

  1. you made a representation
  2. which you knew at THAT time was false
  3. you made that representation for the purpose of deceiving the creditor
  4. the creditor relied on this representation
  5. the creditor was damage by your representation.

For example:

  1. a person gets a loan by representing that he or she has a certain amount of income
  2. while knowing that income amount was inaccurate
  3. with the purpose of fooling the creditor into making the loan
  4. resulting in the creditor relying on this income information in making the loan
  5. and losing money when the person didn’t pay back the loan

What Happens When a Creditor Alleges Fraud

Proving all five of these necessary elements often isn’t easy. So creditors tend not to object unless they believe they have a strong evidence of fraud. In the vast majority of consumer bankruptcy cases no creditors raise any fraud-based challenges.

When a creditor does raise such a challenge it does so in a specialized lawsuit in the bankruptcy court. This “adversary proceeding” usually focuses directly on whether the creditor can prove the five elements of fraud.

Such adversary proceedings almost always get settled. That’s because the amount of money at issue doesn’t justify the expense in attorney fees and other costs that can accrue quickly for both sides.  

Staying Allegedly Fraudulent Debts

The “automatic stay” imposed against virtually all creditor collection action also applies to allegedly fraudulent debts. If the creditor has alleged fraud prior to your bankruptcy filing, the filing will at least temporarily stop all collection on the debt. The “automatic stay” stops “any act to collect, assess, or recover a claim against the debtor.”  (Section 362(a)(6) of the U.S. Bankruptcy Code.)

Then, as mentioned above, the debt will either get discharged or not. If the creditor doesn’t file an adversary proceeding in time, the debt DOES get discharged. If the creditor files an adversary proceeding but then doesn’t prove fraud, the debt is discharged.

On the other hand, if the creditor does prove fraud the debt is not discharged and the creditor can then pursue the debt. It gets a judgment stating that the debt is not discharged and collectible. Then the creditor can use all the usual collection methods to collect the debt.  

However, because these matters are usually settled, the settlement usually includes an agreed payment plan. So in the unlikely event that a creditor DOES allege fraud against you, files a timely adversary proceeding, AND convinces the bankruptcy judge that all the elements of fraud were present, you would still very likely have a workable way to pay the debt without worrying about being hit by unexpected collection actions.


The Judge’s Ruling in a Dischargeability Proceeding: an Example

April 7th, 2017 at 7:00 am

In our example of the adversary proceeding about whether a debt gets discharged, here is the bankruptcy court’s ruling on the matter. 

This is the last of six blog posts in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last five posts about all the steps in the “adversary proceeding” so far, including the trial itself. In the last one, lawyers for the creditor and the debtor gave their closing arguments. Today the judge announces and explains her ruling.

The Judge’s Opening Remarks

At issue in this adversary proceeding is whether the debtor, Marshall, can discharge his debt to the creditor, Heather. The loan was made five years ago for $35,000; its current balance is about $21,000. The purpose of the loan was for Marshall to start a car repair business. Heather is Marshall’s aunt. At Heather’s request, Marshall completed a loan application and signed a promissory note. As she instructed, after completing and signing these documents Marshall delivered them to Heather’s lawyer. The loan was not secured by any collateral.

For four years Marshall paid the monthly payments on time. But about a year ago there was a fire in the building where his shop was located. He had to shut down his business for a month and replace some of the shop’s equipment. This deeply hurt his business. He stopped the monthly payments to Heather and was eventually forced to close down his shop.

A few weeks ago Marshall filed a Chapter 7 case. Heather responded by filing a complaint asking this court to declare that her debt not be discharged.

Her complaint was based on the allegation that Marshall obtained the loan through fraud. Specifically, she alleged that Marshall lied on his loan application by not listing a $7,500 debt that he owed at the time to another aunt. She argued that under  Section 523(a)(2)(B) of the Bankruptcy Code this omission constituted 1) the “use of a statement in writing” 2) that was “materially false” 3) about his “financial condition” 4) on which Heather had “reasonably relied,” and 5) which Marshall had prepared “with intent to deceive” her.

Marshall admitted allegations #1 and #3. He disputed allegations #2, 4, and 5. Heather had the burden of presenting evidence establishing that that all of these three disputed allegations were more likely true than not true in order for her to prevail.

The Ruling

After carefully listening to and reviewing all of the evidence admitted at trial, I have determined s follows.

First, Marshall prepared the loan application “with intent to deceive” her.

Second, Marshall’s omission of the prior $7,500 debt from Heather’s loan application was clearly false but, under the evidence presented, was not “materially false.”

And third, Heather did not “reasonably rely” on the loan application in deciding whether to make the loan.

The Rationale for “Intent to Deceive”

Marshall rationalized his omission of the outstanding $7,500 debt two ways:

    • He wanted to avoid Heather potentially deciding not to make the loan to him for what he saw as an irrelevant and irrational reason. He knew Heather could be erratic and unreasonable. He’d heard she was having a personal dispute with his other aunt who had made the earlier loan to him. He understandably didn’t want what he considered totally unrelated to the loan clouding her judgment.
    • Marshall guessed that Heather’s decision about making the loan was based on factors not connected to the loan application. It turns out that he guessed correctly. But at the time he completed the application this was nothing but wishful thinking on his part.  

These rationales may have been understandable and seemingly justifiable. But they do not change the clear fact that Marshall omitted the $7,500 loan with the intent to deceive Heather. And, importantly, his specific intent was to deceive her into making the loan.

The nuance that he was trying to prevent her from being irrational does not matter. The nuance that he hoped she wasn’t actually going to rely on the loan application also does not matter. His entire purpose in making the omission was deceit, deceit calculated to induce her into giving him the money.

So, this court finds that Heather has met her burden of proof as to Marshall’s “intent to deceive” her.

The Rationale for “Material Falsity”

Marshall’s omission on the loan application was clearly false.

The question is whether the omission was materially false. Given that the prior loan was a family loan just like the one Heather was considering may make omitting it more relevant. Given that the $7,500 loan balance was not an insignificant amount also makes its omission appear to be a material one.

However, what determines materiality in this statutory context is a specific objective standard. What is crucial under the law is whether Heather would have still made the loan to Marshall had he listed the prior loan in Heather’s loan application. Whether a falsity is material turns on whether it affected the creditor’s loan-making decision.

Based the evidence (as discussed in more detail in the next section), Heather would clearly have still made the loan if the prior debt had been accurately listed in the application. Since Marshall’s omission would not have made a difference in Heather’s decision, that omission was not materially false.

So, this court finds that Heather has not met her burden of proof as to the “material falsity” of Marshall’s omission.

The Rationale for “Reasonably Rely”

Heather admitted she never looked at the loan application after Marshall completed it. She asked him to deliver it and the signed promissory note to her lawyer without her looking at them beforehand. She did not instruct the lawyer to review the application, inquire into Marshall’s credit record, or do anything else to determine his financial condition. She did not discuss the content of the loan application with her lawyer. She did not rely on the loan application whatsoever. So she could not have reasonably relied on it either.

Heather also affirmatively testified that she based her loan decision on matters of family connection and loyalty. She clearly did not rely, reasonably or not, on the completed loan application.

So, this court finds that Heather has not met her burden of proof as to her “reasonable reliance” on Marshall’s application and the omission contained in it.


Therefore, since Heather has not met her burden of proof as to these last two allegations as required under Section 523(a)(2)(B) of the Bankruptcy Code, Marshall’s debt to her will be discharged in his Chapter 7 case.


The Trial in a Dischargeability Proceeding: an Example

April 3rd, 2017 at 7:00 am

In our example about the process about whether a debt gets discharged, here’s what happens at the bankruptcy court trial itself. 

This is the fourth blog post in a series showing how a legal dispute gets resolved in bankruptcy court. The process is called an “adversary proceeding”—essentially, a lawsuit in bankruptcy. The dispute at issue is whether a debtor’s Chapter 7 “straight bankruptcy” will discharge—permanently write off—a particular debt.

The Story So Far

The creditor, Heather, has formally objected to the discharge in a complaint—see our blog post of a week ago. Essentially, she alleged that the debtor, Marshall, her nephew, lied in the credit application she asked him to complete. He did not include a $7,500 debt that he owed to another aunt. Because of this fraud on her, Heather has now argued that Marshall should not be able to discharge the $21,000 that he still owes her.

Marshall, through his bankruptcy lawyer, filed an answer to Heather’s complaint—see two posts ago. He admitted that he had not included the $7,500 debt in Heather’s loan application. But he argued that his omission wasn’t significant enough to make his application “materially false.” Also, he figured that Heather had already heard about his prior debt through family gossip. So she couldn’t “reasonably rely” on his omission in making the loan when she already knew about that prior debt. Finally, Marshall didn’t omit the prior loan from the application with “intent to deceive” Heather, again since she already likely knew about it.

See our last blog post for what happened when we got into the next stage of the litigation—“discovery.” That’s the step where both Marshall and Heather tried to get at the relevant facts. In this case they each sent the other a formal list of questions to answer—interrogatories. Their sworn answers indicate how they would testify at a trial, if the case didn’t settle before then.


After a debtor and creditor finish “discovery,” they usually settle their dispute. That’s because at this point it tends to become much clearer who would likely prevail at a trial.

Also, a trial is very expensive. A lot of time goes into preparing for a trial, and for the trial itself. So even a relatively straightforward trial costs a few thousand dollars in lawyer time. That encourages settlement, especially after the facts are more clearly on the table.

Sometimes the adversary proceeding ends at this point with a slam dunk for one of the two sides. A creditor sees that it is going to lose and simply dismisses the adversary proceeding. Or the debtor sees that the creditor has strong grounds against the discharge of the debt and agrees to pay it all.

But most of the time a settlement is needed because it’s not a slam dunk for either side. Usually the debtor must agree to pay something to get the creditor to not chase the rest of the debt.

If there is no settlement, the case goes to trial.

Marshall’s Testimony at Trial

After opening statements by their lawyers, Marshall testified under oath as follows:

  • He omitted the prior $7,500 loan in the application because he figured that Heather had already heard about it.
  • In his conversations with Heather as she was considering lending him the money, she told him she was doing out of their family connection instead of conventional economic issues like his creditworthiness and capacity to pay it back. He got the strong impression from her that the content of the loan application was not important.
  • He was not trying to trick her about anything, such as the amount of his debts. He just didn’t think that the application had much bearing in her decision whether to lend to him.

On cross-examination by Heather’s lawyer, Marshall admitted:

  • He also omitted the prior loan from the application because Heather had a reputation for being unpredictable. He’d heard she was having a feud with the other aunt to whom he owed that other loan. He was desperate to have her give him the money. He didn’t want to give her any excuse for not going ahead with it.
  • Heather did tell him that her lawyer was preparing loan documents because she wanted to “make it all legal.” He did not really know how much she was going to rely on the content of the loan application in making her decision.
  • He may have been engaging in “wishful thinking” to guess that Heather was not putting much weight on the content of the loan application. Again, the truth was he simply didn’t know how she was deciding. He had been very relieved that she gave him the loan.

Heather’s Testimony at Trial

Heather then testified under questioning by Marshall’s lawyer as follows:

  • She had known about Marshall’s earlier loan from the other aunt. It was made years before Marshall approached her about the business loan. She’d heard that loan had been for him get a community college degree in auto repair without needing to work at the same time. Its amount was less what he needed from her for the business loan.
  • She did not review the loan application after Marshall had completed it. She talked with her lawyer about it very generally—mostly just confirming that Marshall sent it to the lawyer. She did not discuss any of its details with her.
  • Heather based her decision on whether to make the loan to Marshall on family considerations—on her sense of connection and obligation to him. Not having had kids herself, she felt closest to him of all her nieces and nephews. She definitely had the financial means to help him. She believed that he would do his very best at making the business successful. From conversations with him, she became convinced that he had the talents and drive needed. So she decided she wanted to help him achieve his dream of creating his own car repair business. But now she wanted him to repay her loyalty to him with the return loyalty of repaying the loan. 

Closing Arguments and the Bankruptcy Judge’s Determination

Next time (this coming Wednesday morning) we finish this series with the two lawyers’ closing arguments and the judge’s ruling.


Answering a Creditor’s Dischargeability Complaint: an Example

March 29th, 2017 at 7:00 am

Here’s an example showing how to answer a creditor’s complaint objecting to the legal write-off of a debt in bankruptcy. 

The last blog post showed, through an example, how a creditor in a Chapter 7 bankruptcy case raises an objection to the discharge of its debt. Please check that out for the full facts of the dispute and what had happened so far. Today we pick up where we left off, after the creditor has formally filed its objection to discharge.

Summary of the Loan and the Complaint

Basically, the story is that five years ago Marshall persuaded his aunt to lend him $35,000 for a business loan. He completed the required loan application without referring to a $7,500 balance he already owned on a personal family loan. He’d made payments on that personal loan perfectly. So he rationalized his omission by figuring that this existing loan was more of a positive than a negative. It demonstrated his creditworthiness on family loans instead of being any kind of detriment. Nevertheless he didn’t want to give his unpredictable aunt, Heather, a reason to not give him the new $35,000 business loan.

But five years later, for reasons explained last time, Marshall closed his auto repair business and filed bankruptcy. Heather was enraged about Marshall not paying the debt. She had her lawyer file a complaint objecting to the discharge of the $21,000 remaining balance.

Under Chapter 7 bankruptcy most debts are discharged. To avoid discharge, a creditor has to show grounds that fit within the relatively few grounds that the law allows.

Heather’s complaint alleged that Marshall had gotten the $35,000 business loan by defrauding her. Consistent with what is required in bankruptcy law, her complaint alleged that Marshall obtained the loan through a written application:

  1. that was “materially false”
  2. about his “financial condition”
  3. on which Heather had “reasonably relied,” and
  4. Marshall had not included the $7,500 owed to the other aunt “with intent to deceive” Heather.

Section 523(a)(2)(B) of the U.S. Bankruptcy Code.

If Heather is able to convince the bankruptcy judge that the facts support these four elements, she’ll win the dispute. The $21,000 remaining balance would not be discharged in Marshall’s Chapter 7 case, and he’d remain liable on it.

The Answer

Through his bankruptcy lawyer Marshall responded by filing a formal answer. In his answer he had to answer each one of Heather’s allegations directly.

1. He admitted that his omission of the $7,500 on his written application was a falsity. He lied by omission. But he denied that this omission was “materially false.”

For an inaccuracy on a financial statement to be “materially false,” courts have “examine[d] whether the lender would have made the loan had [s]he known of the debtor’s true financial condition.” Matter of Bogstag, p. 375. Marshall argued that Heather would have made the $35,000 loan even if she had known about the $7,500 balance on the earlier loan, given his perfect payment history on that loan.

2. Marshall admitted his omission about the prior loan was indeed about his “financial condition.”

3. He denied that Heather had “reasonably relied” on his omission. He believed that she had not relied on the application so much as on personal and family considerations. He didn’t know whether she’d even read the application before deciding to give him the loan. If she had read it, he suspected she hadn’t really focused on his debts or on the amounts stated. He denied this element of the complaint in the hopes of learning through the litigation process that Heather had not relied on the application at all, much less reasonable relied on it.

4. Marshall denied that he’d excluded the prior $7,500 “with intent to deceive” Heather. He hadn’t thought, or at least had hoped, that Heather wouldn’t care about that debt. In particular, he knew that Heather was having a quarrel with the other aunt who had made that prior loan. So Marshall was concerned that Heather would, out of spite, somehow use that to irrationally deny him the loan. He wasn’t trying to cheat her into making the loan. He was just trying to avoid having an irrelevant family feud mess things up.


“Discovery” is the procedure for discovering the facts relevant to the dischargeability dispute. In our next blog post we’ll show how the facts were “discovered” here in this dispute between Marshall and Heather.


Resolving a Creditor’s Dischargeability Objection: an Example

March 27th, 2017 at 7:00 am

Here’s an example showing in a practical way what happens when a creditor objects to the legal write-off of a debt in bankruptcy. 


The last three blog posts were about the procedure for litigating whether a debt gets discharged in bankruptcy. Let’s bring this to life with an example.

The Loan

Marshall had spent 10 years learning everything he could learn as an auto mechanic at the local Ford dealership. He was 30 years old, and itched to open his own auto repair shop. So, five years ago, Marshall asked his financially well-off aunt, Heather, to lend him $35,000 to help him to start his business. She had her concerns, but agreed, only if they did it in a business-like manner. So she had her lawyer write up a loan application and promissory note.

Marshall completed the loan application, but not quite accurately. He was too embarrassed and afraid to include a $7,500 debt he already owed to another aunt. She was from the other side of the family so he knew Heather wouldn’t find out about that debt. Besides, he’d been paying on it perfectly for years, bringing the balance way down from its original amount. So he figured that, if anything, that loan was proof of his creditworthiness with family loans. But he didn’t want to risk Heather not seeing it that way and not giving him the business loan.

So Heather lent him the $35,000, Marshall signed a promissory note to pay it back at 6% annual interest, through monthly payments of $400 per month.

For four years Marshall paid the $400 monthly payments perfectly. His auto repair business was doing pretty well for a new business in a competitive market.

The Fire

But then there was a fire in the building where his shop was located. The fire itself did not get into his shop but it did result in serious smoke and water damage. He had to shut down for a full month and replace some expensive equipment. He learned that his insurance did not cover nearly as much as he’d expected it would. He struggled to recover.

He stopped sending Heather the $400 payments because he simply did not have the money. She was understanding at first. But then, after a year of no payments as the business continued to falter, Heather became impatient. An unrelated family feud erupted between Heather and her brother, Marshall’s father, and Marshall got caught up in it. Heather had her lawyer sue Marshall for the $21,000 he still owed.

Marshall got an offer to go back to work at the Ford dealership he’d left five years earlier. So he decided to close his business, and filed a Chapter 7 bankruptcy case to discharge his accumulated debts and get a fresh financial start.

The Complaint

Heather was very angry that Marshall did not intend to pay her back the rest of the business loan. She saw that he was as irresponsible and undependable as his father, her brother, who she now couldn’t stand. She asked her lawyer what she could do about it. Heather told the lawyer that she knew that Marshall had not included his $7,500 debt to his other aunt when he’d filled out Heather’s loan application. She’d know about this for years but had never told Marshall. Heather learned that this might give her the grounds for stopping the debt from being discharged.

So Heather instructed her lawyer to start an adversary proceeding in Marshall’s bankruptcy case objecting to the discharge of the debt. The complaint alleged that Marshall had gotten the $35,000 business loan through a written application:

  • that was “materially false”
  • about his “financial condition”
  • on which Heather had “reasonably relied,” and
  • Marshall had not included the $7,500 owed to the other aunt “with intent to deceive” Heather

See Section 523(a)(2)(B) of the U.S. Bankruptcy Code. It’s about the potential exception to discharge for the use of a written false statement used to obtain credit.

The Answer

After receiving the complaint in the mail, Marshall met with his bankruptcy lawyer. After talking the situation over thoroughly, his lawyer advised him to fight Heather’s adversary proceeding. In our next blog post we’ll tell you how they answered the complaint and what happened afterwards.


Going to Trial on a Nondischargeability Dispute with a Creditor

March 24th, 2017 at 7:00 am

The trial, almost always in front of a bankruptcy judge and no jury, is the final determinator whether the challenged debt gets discharged. 

Today’s is the last of three blog posts on the procedure for litigating whether a debt gets discharged in bankruptcy.

Discharge Challenges Are Rare, Going to Trial is REALLY Rare

To determine whether or not a debt gets discharged in bankruptcy very rarely involves any litigation. The vast majority of debts are simply discharged. Those that are not are the exception. And most of those exceptional debts that bankruptcy does not discharge are either never discharged—such as child support—or are not discharged unless some rather clear conditions are met—such as with income taxes.

With the debts that are easily discharged, the creditors have no grounds to object and so they don’t. With debts that clearly cannot be discharged, there’s no point for debtors to complain and so they don’t.

There are only a few specific circumstances in which creditors have grounds for objecting to discharge. Mostly this is either when the debtor allegedly incurred the debt fraudulently, or caused “willful and malicious injury” to the creditor or its property. Since these circumstances do not apply to most debtors, creditors don’t usually object to a debt’s discharge.

When creditor’s DO object to discharge, the matter very seldom goes all the way to trial. That’s consistent with lawsuits in general—they seldom go to trial. Creditor objections to discharge are usually either:

  • dismissed (withdrawn or thrown out) because the creditor did not have valid grounds to object
  • settled with the debtor paying the full debt because the grounds for objection were solid
  • settled with the debtor paying only a portion of the debt because the grounds were weaker, but not weak enough to justify dismissing the objection

Why Creditor Objections to Discharge Seldom Get All the Way to Trial

The one-word answer is: money. Litigation is expensive.

Nondischargeability litigation is usually less expensive than most because the legal and factual issues are often narrower. For example, if you are accused of fraud by not including a significant debt in your written application for a loan, a key factual question may be whether the creditor reasonably relied on that inaccuracy when making the loan. That may simply turn on whether the lender pulled a credit report before making the loan, and whether that missing debt was disclosed on that credit report. If so, the debtor would have a strong argument that the creditor did not reasonably rely on the debtor’s incomplete loan application, which is a required element to show fraud.

But even if the issues are comparatively simple, litigation can still be an inefficient dispute-resolving mechanism. Going through “discovery” to get at all the pertinent facts can take a lot of time and effort. The truth of what happened can be slippery.

And of course lawyers are expensive. Unless the amount of debt is very large, the cost of litigating can approach or even exceed the amount in dispute. Spending so much  doesn’t make economic sense. So there is lots of practical pressure on both sides to settle a nondischargeability dispute quickly. And that almost always means doing so before it gets all the way to trial.

Settlement by Mediation or Arbitration

If the debtor and creditor can’t settle informally, most bankruptcy courts encourage “alternative dispute resolution” through mediation or arbitration.

Mediation involves a mutually respected mediator who can’t force settlement but can effectively encourage it. The mediator helps each side see the truth of their positions, often successfully inducing settlement.

Arbitration is a simplified trial-like procedure in which the arbitrator determines whether or not the debt is discharged. That determination may be binding or not. Either way, it can be a quicker way of getting to a determination or settlement.

Neither of these procedures is inexpensive, but usually cost much less than a full trial.

Going to Trial

A trial is the culmination of a lot of effort. The complaint has laid out the creditor’s step-by-step argument why the debt should not be discharged. The debtor has made clear which parts of that argument her or she disputes. Both parties have dug up the facts through the discovery process. Now it’s time bring it all together in front of the bankruptcy judge.

Trials in bankruptcy adversary proceedings are almost always in front of a judge instead of a jury. That streamlines the process considerably. Most consumer nondischargeability trials take only from a half day to one or two days. As we said above, the issues tend to be pretty sharply focused. So the evidence that each side presents can be presented relatively quickly.

The trial generally proceeds in the way you can imagine from everything you’ve heard about court trials. Each side usually makes an opening statement about what they intend to prove. Then each side presents witness testimony and documentary evidence to support its argument. There is opportunity to challenge the testimony and evidence presented by the other side. There are detailed rules about what evidence can be presented and how.

After all the evidence has been presented, and each side has had the opportunity to rebut the other’s evidence, each gives a closing statement. Then the judge, after weighing all the testimony and evidence, decides whether the debt at issue is discharged or not. He or she enters a judgment so stating.


“Discovery” during a Nondischargeability Dispute with a Creditor

March 22nd, 2017 at 7:00 am

“Discovery” covers all the methods used to get at all the relevant facts in a dispute with a creditor about the discharge of a debt. 

Our last blog post was about the beginning of the “adversary procedure” for deciding whether a disputed debt gets discharged. Like many other legal procedures, it starts with a formal summons and complaint, here usually filed by a creditor.

(Either a creditor or debtor can file a complaint. But since we are focusing on debts that get discharged unless a creditor objects, for our purposes we assume that it’s the creditor filing the complaint and the debtor responding to it.)

The debtor responds to the complaint with either a motion to dismiss or an answer. The motion to dismiss is appropriate when the creditor’s complaint does not make an argument clear enough to respond to. An answer states step by step what, if any, parts of the complaint the debtor agrees with and what parts the debtor does not.

So then the scene is set. Both sides have made their basic arguments clear—what they dispute and what they don’t.

The next step is to get at the facts. That’s the purpose of “discovery.”

The Discovery of the Facts

“Discovery” refers to the procedure for discovering the facts that are relevant to the dispute.

The dispute is whether or not a debt gets discharged—permanently written off in bankruptcy. In the categories of debts we are considering here, the creditor must prove certain facts or the debt IS discharged. The creditor has the “burden of proof.”

Broadly speaking, the creditor has to show that the debtor intentionally lied when incurring the debt. (Section 523(a)(2) of the U.S. Bankruptcy Code.) Or the debtor caused “willful and malicious injury” to someone or their property. (Section 523(a)(6).) (There is much more to this, and about what facts must be proven, but this is enough for today’s purposes.)

There are two major steps involved in “discovery” under federal bankruptcy rules.

Automatic Disclosure Requirements

There is a fair amount of information that both sides must automatically disclose to the other:

  • the names of potential witnesses and lists of records, such as relevant documents, emails, and information on computers and in other electronic form
  • contact information of all witnesses and experts
  • copies of the documents and the records, or a way to get access to them

(See Federal Rules of Bankruptcy Procedure (FRBP) 7026 and Federal Rules of Civil Procedure (FRCP) 26(a) about “Required Disclosures.”)

The point of this step is to get most of the facts out quickly and efficiently. One benefit is so that the parties can determine whether their case is as strong as they first thought. Adversary proceedings often settle at this stage for this reason.

Additional Discovery Methods

Both sides can request and get more information through a number of methods. These requests have to relate to the arguments being made in the complaint and other pleadings. These methods allow the parties to:

When all the facts have been put on the table through whichever of these methods, and if the parties do not settle the matter, the adversary proceeding is ready for trial. We’ll finish with that in our next blog post two days from now.


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