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A Creditor’s Precautionary Motion about the Automatic Stay

February 26th, 2018 at 8:00 am

A creditor might file a motion to avoid violating the stay, or to get permission to take some action other than collect a debt.   


In the last three blog posts we’ve covered five reasons why creditors ask for “relief from the automatic stay.” The first one is by far is the most common.  Creditors ask for “relief from stay” to take back collateral, or to establish payment and other terms that you must meet to avoid losing the collateral.

The other four reasons were to get permission to finish a lawsuit or other proceeding to determine:

  1. whether you owe any debt to the creditor
  1. the amount of that debt, assuming you owe something
  2. whether you owe a debt which can be paid by insurance (instead of you personally)
  3. whether the debt you owe can be discharged (written off) in bankruptcy     

Today we cover two more reasons that a creditor may ask the bankruptcy court for “relief from stay.” These tend to be precautionary—arguably the creditor or other party could act without bankruptcy court permission. But because of the risks of potentially violating the automatic stay the party first asks for permission.

So, a party could file a motion for relief from stay

  1. to get a court determination whether the creditor’s intended actions would violate the automatic stay
  2. to get permission to take some other action against you not involving collecting a monetary obligation

Penalties for Violation of the Automatic Stay

When a creditor or other party learns that you’ve filed a bankruptcy case, it knows that it can no longer take collection action against you to collect any debt. If it does take such action it would likely be in violation of federal law and may have to pay damages.

The U.S. Bankruptcy Code (at Section 362(k)(1)) says that

an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

In other words there can be significant financial penalties for taking action against you in violation of the automatic stay.

1. Avoiding Violation of the Automatic Stay

The problem is that sometimes it’s not crystal clear whether a certain action by a creditor would violate the automatic stay or not. Bankruptcy Code Section 362 about the automatic stay has 8 subsections about the kinds of actions that bankruptcy stays (stops). It has 28 exceptions about the kinds of creditor actions that the automatic stay does not stop. The entire code section contains about 6,500 words—lots of potential for confusion.

So how does a creditor or other adversary of yours avoid the potentially serious penalties for violating the stay? It can file a precautionary motion for relief from stay to put the issue before the bankruptcy court. The creditor/adversary doesn’t act against you until after getting the court’s determination that it is acting legally.

For example, assume that you file a bankruptcy case while you are in the midst of a divorce. Your ex-spouse wants to finish the divorce proceeding regardless of your bankruptcy filing. The Bankruptcy Code says it’s not a violation of the automatic stay to finish a divorce proceeding. However it IS a violation to the extent that “such proceeding seeks to determine the division of property that is property of the estate.”  (Section 362(b)(2)(A)(iv).)

So your ex-spouse may file a precautionary motion to find out if the property to be divided is included in “property of the [bankruptcy] estate.” He or she wants to know how to go forward with the divorce without violating the automatic stay.

Note that you can simply not respond to such a motion if you’re fine with the action your adversary proposes. Then the bankruptcy judge will likely give the adversary the clarification it needed. If you don’t object your adversary will more likely get what it is requesting.

But if you do want to object, you respond through your bankruptcy lawyer to the creditor’s motion. The judge then decides whether the creditor’s proposed action would be a violation of the automatic stay. And if it would be a violation, the court usually also decides whether the adversary is still entitled to relief from stay to proceed with his or her action.

2. Permission to Take Action Other Than to Collect a Debt

Similarly, a creditor may ask for relief from stay to take some action separate from collecting its debt. It is essentially asking to take some action other than debt collection, and wants to be sure it can.

When you enter a contract with a creditor, you often have contractual obligations beyond just paying the debt. For example, if you’re behind on rent payments on an apartment when you file bankruptcy, you owe a debt. The landlord cannot pursue you on that debt because of your bankruptcy filing. But it may want to evict you so that it can rent it to another tenant. So the landlord could file a motion for relief from stay to get permission to evict you. That motion would make clear that the landlord is NOT asking for or getting permission to collect the back rent. It’s just asking for permission to proceed with an eviction-only lawsuit. If the landlord succeeded in that motion, the court’s order granting the permission would also be limited to the eviction proceeding, and would not allow collection of the back rent.

(There are special rules about the automatic stay involving residential rentals. So be sure to discuss this with your bankruptcy lawyer if it pertains to you. Also, see Section 362(b)(22 and 23) of the Bankruptcy Code and our recent blog posts about this.)


Prevent Losing the Automatic Stay Because of a Prior Bankruptcy Filing

February 2nd, 2018 at 8:00 am

Either 1) wait one year to file your bankruptcy case after getting a prior bankruptcy case dismissed or 2) justify why the dismissal happened. 

The last few blog posts have been about situations in which the automatic stay is temporary, but still very effective. These situations have involved individual debts or sets of debts—such as income taxes or student loans. The automatic stay’s protection from debt collection in a Chapter 7 case is temporary for debts which survive the bankruptcy case because the automatic stay expires once the case is completed—usually just 3-4 months after filing. But that may be fine with income taxes and student loans for reasons explained in the last two blog posts.

Today we get into a situation much more dangerous. Here the automatic stay protection from debt collection could be lost as to ALL your debts.

The Automatic Stay

We start first with a bit of background. One of the most important and immediate benefits of filing bankruptcy is the automatic stay. This is the federal law that stops creditors from collecting your debts immediately when you file your bankruptcy case. It protects you, your income, and your assets. The automatic stay usually provides this protection as long as your case is open. (See Section 362 of the U.S. Bankruptcy Code.)

This is a crucial to bankruptcy relief. You certainly don’t want to lose this tremendously important benefit of bankruptcy. You especially don’t want to lose it unexpectedly, just when you are most counting on it. Yet there is a situation this could happen, so you want to know about and prevent it.

Losing the Automatic Stay

You could file a bankruptcy case and lose his protection essentially without warning 30 days later. The situation at issue is if you are now considering filing a bankruptcy case and you filed one prior bankruptcy within the last 365 days, which was subsequently dismissed. (See Section 362(c)(3) of the Bankruptcy Code.)

Don’t immediately assume this does not apply to you. IF you didn’t even think about and take ANY action to file a case in the last 365 days then in fact this problem likely doesn’t apply to you. But be very careful. We have seen circumstances when a prior bankruptcy was filed and dismissed without the debtor being fully aware of it then and so without remembering it later when filing another case later.

Avoid Losing the Automatic Stay 30 Days After Filing

Assume that about 10 months ago you had filed a bankruptcy case. But immediately after filing you settled the debt that had pushed you into bankruptcy. So you didn’t take any further action on your bankruptcy case, and it got dismissed (thrown out and closed).

Now, many months later, your other creditors are causing you big trouble so you again file a bankruptcy case. You don’t consider the prior case to have been a real bankruptcy filing because you didn’t follow through on it. You consider the new case to really be your first bankruptcy filing. You may even tell your bankruptcy lawyer about the prior filing.

But that would be a mistake. As a result, the automatic stay would immediately go into effect with the current bankruptcy filing as usual. However, the automatic stay would automatically expire 30 days later. That is, it would expire unless by then you and your attorney would show the court that you meet certain conditions. 

Those conditions involve justifying why the previous case was dismissed and why the present case is being filed. Depending on the exact circumstances, you may be able to justify filing a second case within a year. These circumstances involve the reasons for the prior case dismissal, and financial changes from the prior filing until the present one. (Again, see Section 362(c)(3).)

However, if you are not be able to convince the court, you’d be subject to ongoing debt collection from 30 days after filing until the debts were discharged 2-3 months later. That would make for an unexpected mess, and likely quite an expensive one.


So, make sure there was no prior filed and dismissed bankruptcy case within the last 365 days before the filing of your current case. If there was one, consider waiting for a full year to pass before filing the new case. If that’s not feasible, discuss with your lawyer whether your circumstances would result in your bankruptcy judge preserving the automatic stay because your prior filing/dismissal and new filing were justified.


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.


Discovering the Facts in a Dischargeability Proceeding: an Example

March 31st, 2017 at 7:00 am

Here’s how the debtor and creditor get at the facts in an adversary proceeding about whether a debt gets discharged. 


We’re going through a series of blog posts showing by example how a creditor’s formal objection to discharge goes in bankruptcy court.

Here are the facts, briefly. Five years ago Marshall got a $35,000 loan from his aunt, Heather. But he wasn’t completely upfront with her at the time, neglecting to list in his loan application a $7,500 debt to another aunt. So now, after Marshall filed bankruptcy, Heather filed a formal complaint accusing him of fraud for this lying by omission. Specifically, she alleged that his omission about the other loan was “materially false,” Heather “reasonably relied” on that omission in making the loan, and Marshall made the omission “with intent to deceive” her. (There are other elements of fraud but these are the ones that are at issue in this example.)

Marshall filed an answer by denying that this omission was “materially false.” That’s because he thought that Heather would have made the $35,000 loan even if she had known about the $7,500 balance on the earlier loan. He also denied that Heather had “reasonably relied” on his omission because he didn’t think that she had relied on the application at all. Finally, Marshall denied that he’d excluded the prior $7,500 “with intent to deceive” Heather. He hadn’t thought she’d care one way or the other.

He felt he hadn’t set out to cheat her at all. Since he hadn’t, he understood the law gave him the right to legally write off the now-$21,000 debt in bankruptcy.

Burden of Proof

Debts like Marshall’s get discharged unless the creditor finds legally valid grounds for the bankruptcy court to deny discharge. The burden is on the creditor to find facts supporting those grounds.

Here in our example Heather has to bring evidence establishing ALL of the following:

  • Marshall’s omission was “materially false.” That is, the omission not only made his application false. It was so false that Heather would not have made the loan had Marshall included the $7,500 debt.
  • Heather had “reasonably relied” on the omission in making the loan. That is, Heather had at the time not only relied on the lack of a $7,500 loan. She had relied on that omission reasonably. Under all the circumstances it made sense for her to rely on the accuracy of Marshall’s application.
  • Marshall acted with “intent to deceive” Heather. He had not included any reference in the loan application to the $7,500 he owed to the other aunt because he purposely wanted to fool Heather into giving him the loan.

“Discovery” Methods

“Discovery” is the formal procedure for discovering the relevant facts in a lawsuit. In our context it’s the way that Marshall and Heather get at the facts relevant to their discharge dispute.

The facts are “discovered” mostly through these four methods:

“Discovery” in Our Example

The lawyers for Marshall and Heather wanted to try to keep litigation costs down for their clients. So they agreed to avoid depositions if they could get the facts they needed without them. Depositions can be time-consuming and expensive.

So both parties prepared and delivered Interrogatories.

Heather’s Interrogatories to Marshall

Here are some of the most important interrogatories that Heather presented to Marshall, along with his sworn answers:

1. Were you aware of the $7,500 balance you owed your other aunt at the time you completed Heather’s loan application?


2. If you were aware of this other loan balance, why did you not include it in the application?

I did not include it because I really didn’t think Heather would care one way or the other. I’d made payments on that personal loan perfectly, bringing it down from $20,000 to the $7,500 balance at the time. I figured that with this payment history that existing loan was more of a positive than a negative to Heather. It showed my creditworthiness on family loans. However, I’d heard that Heather was in an unpleasant dispute with the other aunt. Heather had a reputation for being unpredictable. So I was afraid of giving her any excuse to not give me the $35,000 business loan. I was pretty desperate to get it from her.

3. Did you intend to deceive Heather into making the loan by omitting the $7,500 debt you still owed to your other aunt?

No. First, I really didn’t think that Heather was basing her decision on the loan on financial and risk considerations. Based on my conversations with her, she seemed to be motivated mostly by family considerations. She was pretty well off, didn’t have kids of her own, and was excited about my business venture. She expressed a desire to help, out of affection and family connection. She acted like the application was a formality and wouldn’t be a major basis for her decision.

Second, I thought Heather may well already know about that other debt. I had borrowed the $20,000 years earlier from the other aunt to get a 2-year community college degree. I knew these two aunts were not very close, but that earlier loan wasn’t any big secret. I figured there was a good chance that Heather already knew about it.

I wasn’t trying to fool her into thinking I was debt-free so that she would make the loan.

Marshall’s Interrogatories to Heather

Here are some of the most important interrogatories that Marshall presented to Heather, along with her sworn answers:

1. Were you aware that Marshall had taken out a loan from his other aunt at the time you agreed to lend him the $35,000 for his new business?

No. I’d heard vaguely about it a few years before that. But it was not in my mind at the time I was considering whether to make the $35,000 loan. I did not know whether he’d paid it off, was making payments at the time, or any such details.

2. If you had been made aware of the $7,500 debt by Marshall including it on his application, would you have made the $35,000 loan to him?

I don’t know. Hard to tell now, more than five years later. It would have made it less likely, for sure. I WAS a little nervous about making the loan anyway. That could have pushed me to change my mind.

3. Did you review the application after Marshall had completed it?

I had my lawyer prepare the application form and I asked her to review it when he’d completed it. But no, I didn’t read it myself. I remember vaguely talking with my lawyer about it, but nothing specifically.

4. On what did you base your decision to make the loan to Marshall?

On whether he was worthy of getting the money. He’d always been a good guy. I don’t have any kids myself. I’d always liked him. He was always a hard worker, an honest young man. He had gotten some bad breaks earlier and I wanted to help. His business plan sounded sensible. He was family.

But now he needs to pay me back. Just because he can write off his other debts doesn’t mean he should write off this one. I was loyal to him. He should return the loyalty by paying back this debt to me.

Next, the Trial

With these facts on the table, this adversary proceeding is ready for trial. We’ll finish with that in our next blog post on Monday.


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.


“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.


The Procedure to Determine whether a Debt Should be Discharged

March 20th, 2017 at 7:00 am

If you decide not to settle but rather fight a creditor trying to make you pay a debt that you want to discharge, here’s what happens. 


Last time we got into the three practical options if a creditor objects to the discharge of one of your debts. Two of those options involve settling the dispute, either immediately or after learning the strengths and weaknesses of your position. The third option is having the bankruptcy judge decide whether or not the debt should be discharged.

That involves going through the entire adversary procedure, the bankruptcy court’s version of a lawsuit, all the way to the judge’s ruling and judgment. (There is no jury in bankruptcy adversary proceedings.)

If you go all the way through an adversary proceeding, what are the steps this involves?

The Start

An adversary proceeding to decide whether a debt gets discharged starts like any other lawsuit. The creditor files a complaint in the bankruptcy court laying out why it thinks the debt should not be discharged.

A debtor can also start the process, filing a complaint showing why the debt should be discharged. This happens with the kinds of debts that wouldn’t be discharged without a court determination that they are. This applies to establishing “undue hardship” to qualify to discharge a student loan. It may also apply to showing that an income tax return was not filed to evade taxes.

But for today’s and the next few blog posts we’re assuming that the creditor is filing the complaint. It’s the kind of debt that would be discharged unless the creditor complains, and does so on time. So it’s usually better for you just to wait and see whether any creditor is going to raise any objections. Often even when they threaten to do so they don’t because of their costs and risks if they do.

The Summons and Complaint

The complaint lays out the creditor’s argument in a legalistic, point-by-point fashion. It states the facts and circumstances why the creditor believes the debt should not be discharged. It ends by asking that the bankruptcy court make a ruling that the debt does not qualify for discharge.

The court issues a summons to inform you of the filing of the complaint, and of your deadline to respond.

The creditor “serves” the summons and complaint on you and on your bankruptcy lawyer. Unlike most lawsuits, this is done by regular mail. Yours is mailed to the address in your bankruptcy filing. This is one good reason to be sure that the court is officially informed of any address changes, and that you monitor your mail carefully.

Responding to the Creditor’s Complaint

If you don’t respond by the stated deadline, the creditor will generally get whatever it is asking for in the complaint. The debt would be declared not discharged and the court would enter a judgment against you saying so.

You and your lawyer have basically two ways to respond to the complaint.

Motion to Dismiss or Compel a More Definite Statement

A complaint may not lay out clearly enough the creditor’s factual and legal argument. It may not make a clear enough case why the debt should not be discharged. It has to give you enough information so that you know what you are defending against.

If not you can ask that the court dismiss the adversary proceeding, unless the creditor fixes the complaint’s deficiencies. If the court agrees and the creditor doesn’t amend its complaint, the court can dismiss the whole proceedings. That sometimes does happen if in the meantime the creditor realizes that it really doesn’t have a good case. Your lawyer may have told the creditor’s lawyer your side of the story, poking holes in the creditor’s argument. The creditor realizes that it’s wasting money, and either pulls out or negotiates a reasonable settlement.

Otherwise the creditor makes the necessary corrections in the complaint and the adversary case moves forward.

Your Answer

If and when the complaint properly lays out the creditor’s argument, you can file an answer. The answer responds point by point to every allegation in the complaint, saying whether you admit or deny each one.

You also have and usually must take the opportunity to provide any defenses to the allegations. These are reasons that may justify or excuse the allegations, and still make the debt dischargeable.

This is also usually the right time to raise any counterclaims. These are any related complaints you may have against the creditor. For example, the creditor may have cheated you in some way in the debt transaction, or in the debt collection process.

It can be crucial to raise defenses or counterclaims at this point in the process. You may be legally prevented from doing so later.  

This is one of the reasons to be completely honest and thorough with your lawyer. It’s important to do so from the beginning of your first meeting with him or her. But to be realistic, you can’t always focus on or remember everything that might possibly be relevant or important in your first meeting or two with your lawyer. But once an adversary proceeding complaint is filed, it’s absolutely necessary that you think through and tell your lawyer everything.

There is nothing that shoots down a creditor’s complaint better than an airtight defense. And sometime there’s nothing that defends you better than taking the offensive with a great counterclaim.

We’ll explain what happens after you file your answer in our next post in a couple days.


Adversary Proceedings by the Debtor

March 8th, 2017 at 8:00 am

Sometimes it’s in your best interest to force an issue in bankruptcy court by, in effect, suing a creditor in an adversary proceeding. 

The last two blog posts have been about you as a debtor being hit by an adversary proceeding. A creditor may try to use that tool to prevent you from legally writing off a debt.  A Chapter 7 or Chapter 13 trustee may try to kick you out of bankruptcy altogether if you don’t follow the rules. Even though these situations are relatively rare, you still want to get advice so that you can avoid them.

However, you can also use an adversary proceeding as a tool to benefit you in certain circumstances. You have some significant practical advantages in bankruptcy court that you would not have in normal state court.

The Advantage of a Limited Issue

The disputes that you can and would want to raise are specific, limited ones. Issues like whether you can discharge—legally write off—a debt. Or whether a creditor violated bankruptcy law and has to pay you damages.

When you have a focused issue such as these, your cost for resolving the dispute are less.

For example, take the issue of whether you can discharge a debt. Most debts are clearly either discharged in bankruptcy or they are not. If you owe some spousal support, that can’t be discharged. There’s nothing to dispute.

But sometimes it’s not so clear. What if you were obligated to sign over a vehicle to your spouse, and there is some indication that your spousal support was reduced for the first year as a result? You haven’t yet signed over the vehicle. Now you are filing a Chapter 13 case which allows you to discharge divorce property settlements. You want to keep the vehicle for yourself. Is the divorce obligation to sign over the vehicle a spousal support obligation or a property settlement one?

The bankruptcy court gets to decide. The issue is a narrow one: is that obligation “in the nature of support” or not for bankruptcy purposes? The divorce court has already determined that divorce law says your spouse gets the vehicle. This is a debt you owe—everybody accepts that. Now the issue is simply whether or not it is a debt that bankruptcy law makes dischargeable. Again, under all of the facts, is it “in the nature of support”? The entire dispute focuses on that single issue, making court resolution of that relatively straightforward and quick.

The Advantage of an Efficient Court

The bankruptcy disputes are resolved quickly because of some practical aspect of bankruptcy litigation.

First, it’s a federal court so resources tend not to be stretched as thin as in many state courts. Often state courts cases move incredibly slowly simply because there are not enough judges to go around.

Second, bankruptcy courts do nothing but bankruptcy. State courts have to deal with a huge range of criminal and civil matters. For constitutional reasons, the criminal cases often take precedence on the court’s calendar. On the civil side, theses courts deal with absolutely everything from apartment evictions to mega-million dollar business disputes. In bankruptcy court the issues are comparatively very limited. So systems have been established to deal with them efficiently. And the bankruptcy judges are essentially experts at these issues and can resolve them relatively speedily. So you get your dispute resolved fast, significantly reducing everybody’s costs.

The Advantage of a Lawyer Already in Your Corner

One of the biggest challenges when you are considering whether to bring a lawsuit is finding a good lawyer to represent you. It’s certainly one of the biggest practical problems if money is tight.

But when you are filing any kind of bankruptcy case, virtually always you’d have retained a lawyer for that purpose. You’ve presumably built up a trusting relationship. You’re likely being hugely benefitted financially from the debts you are discharging. So when you’re confronted with the question whether you should sue a creditor (by filing an adversary proceeding against it), you have a lawyer at your side to advise you about it. He or she is already familiar with your situation. The lawyer is very likely also very familiar with the focused legal issue at hand.


So resolving a dispute in bankruptcy court is to your advantage because you have your lawyer at the ready, an efficient and quick court, and narrow issues to resolve. What are those relatively narrow issues that may make suing a creditor in bankruptcy worthwhile? We’ll discuss them in our next blog a couple days from now.


The Bankruptcy Judge, U.S. Trustee, and Chapter 7 and 13 Trustees

January 16th, 2017 at 8:00 am

Your bankruptcy case makes more sense if you know the roles of the people involved, including the judge and the various trustees. 

The Bankruptcy Judge

A judge is assigned to each bankruptcy case. However, in both Chapter 7 and Chapter 13 cases you will not likely ever see him or her.

In a very straightforward Chapter 7 case, the judge actually has very little to do. He or she tends to get actively involved only if a dispute needs resolution.

In a Chapter 13 case, the judge is much more directly involved. The judge oversees the approval of your payment plan and resolves any disagreements about it. There are often other developments during the course of your case that the judge would need to adjudicate.

Bankruptcy judges are appointed to terms of 14 years. This is unlike regular federal district court judges who are appointed for life. Bankruptcy judges are technically just “judicial officers of the United States district court.” 

The U.S. Trustee

This is someone else who generally flies under the radar in most bankruptcy cases. This office is the mostly behind-the-scene enforcer within the bankruptcy system. Its website describes its role:

The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system.  To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures.  It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

Accordingly, an important job of your bankruptcy lawyer is to avoid you ever needing to hear from the U.S. Trustee!

The Chapter 7 Trustee

You will personally meet your trustee if you are filing a Chapter 7 case. That meeting—at the so-called “meeting of creditors”–will usually not last for more than 5 or 10 minutes.

The Chapter 7 trustee’s job is mostly to determine if you have any assets which are not “exempt”. This means not protected from your creditors. The trustee does this partly by presiding at your “meeting of creditors” about a month after you file your case. In most cases, everything you own IS “exempt.” So the trustee usually makes that determination, which largely ends his or her role in the case.

In the minority of cases in which some of your assets are not “exempt,” your Chapter 7 trustee will have a right to take possession of them, sell them, and distribute the sale proceeds to the creditors. This distribution is based on a schedule of payment priorities among the different legal categories of your creditors.

A Chapter 7 trustee is assigned to your case by the U.S. Trustee from a “panel” of local Chapter 7 trustees. Some trustees in that panel may be more aggressive about pursuing debtors’ assets than others. Your lawyer theoretically cannot influence which trustee you get, but there sometimes are tricks of the trade that can help.

The Chapter 13 Trustee

This trustee is closely involved in your case from its beginning to its end. Because there is usually only one “standing” Chapter 13 trustee assigned to any particular geographic area, your attorney will know in advance who it will be (unlike with Chapter 7 trustees).

The Chapter 13 trustee is usually assisted by a staff lawyer or two and a number of other employees. These people review the Chapter 13 payment plan you and your lawyer propose. The trustee or his or her attorney presides at your “meeting of creditors.” The trustee may raise objections to your payment plan with the bankruptcy judge.

Then once the judge approves a plan, the trustee receives your plan payments and distributes them to the creditors as designated under your plan. The trustee can also file motions at court if you do not make payments as required by your plan. He or she can raise other concerns with the court.

The trustee also tells the court when you have successfully completed all your plan requirements. Then the court can discharge (write off) your remaining debts and close your case.

The Chapter 13 trustee has a number of different roles, some of which are partly inconsistent. His or her task is to maximize how much you pay your creditors but at the same time genuinely wants you to complete your case successfully and to some degree may work with you to that end. Different Chapter 13 trustees juggle these conflicting roles differently. So talk with your lawyer about when you should treat your own trustee as a friend or as a foe.


The Debtor, Creditor, Lawyers, Bankruptcy Clerk, Trustee, and Judge

September 21st, 2016 at 7:00 am

Bankruptcy is a lot easier to understand and much more comfortable to go through when you know who’s who.  



We start a series today about the terms used in bankruptcy cases. Bankruptcy laws and procedures can definitely be confusing. It helps a lot to be able to understand the language used by the people involved.

The People Involved

An appropriate place to start is with the different roles of the people involved. Knowing what each person does and how they fit into the big picture gives you a good start at getting a hang of that big picture.  

The Debtor

This is what the U.S. Bankruptcy Code calls the person filing bankruptcy. See Section 101(13) of the Bankruptcy Code. It’s more neutral and less judgmental in tone than the term used decades ago, “bankrupt.”


These are the individuals and businesses to which the debtor owes money, or which at least claim to be owed money.

The Bankruptcy Code makes clear that the debt or claim must be in existence at the time the bankruptcy case is filed to be a creditor in that case. See Section 101(10).

There are many kinds of debts. We’ll get into them in upcoming blog posts.

Debtor’s Lawyer

A large majority of bankruptcy cases are filed by debtors represented by a lawyer. In fact, bankruptcy law is such a specialized and complicated area of law that most lawyers who file bankruptcy cases focus all or most of their time doing this work.

Your lawyer has a legal duty and a formal ethical duty to serve you and no one else. He or she is bound by law to be loyal to you alone. Your lawyer is required to provide you accurate legal information about your options, and to give you sound advice.

Most bankruptcy lawyers are in the bankruptcy field because they are compassionate and want to help make your life better. Find one that you trust and be honest with him or her in order to be protected and served well.

Creditors’ Lawyers

To state the obvious, creditors have much more financial resources than you to hire lawyers to serve their interests. Consumer creditor employees themselves are usually pretty knowledgeable about the law. They deal with their customers filing bankruptcy all the time, so they know how the game is played. Understandably both their lawyers and employees are trying to do the best for the creditor. The truth is they don’t mind taking advantage of your limited knowledge to serve their interests. You need someone looking out for you.

Bankruptcy Clerk

These are the paper pushers who administer the nuts and bolts of bankruptcy cases. Your lawyer will file your bankruptcy petition and other documents (electronically) with the clerk. This office sends you many (but not all) of the important notices and documents about your case. You’ll likely never have to deal directly with the clerk’s office but these people do a lot behind the scenes.

Bankruptcy Trustee and U.S. Trustee

We’ll focus more attention on the role of the Chapter 7 trustee, Chapter 13 trustee, and U.S. Trustee. For now just be aware that the Chapter 7 and Chapter 13 trustees legally stand in the shoes of your creditors, at least for certain purposes. You and your lawyer work with them in a professional and even friendly fashion much of the time. But essentially their job is to serve your creditors, not you.

You and your lawyer will see your trustee for a short meeting about a month after you file your case. More about your possible dealings with the trustees as we get into Chapter 7 and Chapter 13 terminology.

The U.S. Trustee oversees the Chapter 7 and 13 trustees, and has an enforcement role we’ll discuss more later. You’ll unlikely ever see the U.S. Trustee.

Bankruptcy Judge

A bankruptcy judge is assigned to every case. But the judge is someone else you will not likely ever see. You’ll most likely never see the inside of a courtroom in a consumer bankruptcy case. Often the most contact you’ll have with the bankruptcy judge is seeing his or her signature on the official paperwork.

There are exceptions to this in both Chapter 7 and Chapter 13 cases (as well as in the much rarer Chapter 9, 11 and 12). We’ll tell you about these as we go through other bankruptcy terminology in upcoming blog posts.

We’ll start next time with descriptions of all these different bankruptcy Chapters.

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