What does it mean when a creditor discharges a debt?

skyseoroundtable October 28, 2021

What is an Adversary Proceeding?

In New York, your bankruptcy process can come to a screeching halt if your creditors or trustees file objections and start adversary proceedings.

Reaching the Bankruptcy Discharge Stage

The main goal for everyone going through bankruptcy is to reach the discharge stage – the point where the court permanently releases you from having to pay back certain debts and prevents your creditors from ever trying to collect those debts which were legally forgiven. Read here for more information https://www.ny-bankruptcy.com/will-bankruptcy-clear-all-my-debts.

As part of the chapter 7 and 13 bankruptcy process, a meeting is set up between you and your bankruptcy lawyer, a bankruptcy trustee, and representatives from all your creditors. Your creditors have 60 days from the date of that meeting to file any objections to discharge. An objection to discharge is considered an adversary proceeding, meaning that it is a separate court action within the bankruptcy case. Your creditors must offer the court any burden of proof for their objection, and in the end, a judge may have to decide whether to allow grant the discharge.

Who Can Start an Adversary Proceeding?

Creditors – This can be a single objection from a solitary creditor, or you may have to deal with multiple objections from many creditors.
Chapter 7 Bankruptcy Trustee – If the Trustee feels that you haven’t been honest about your documentation and suspects fraud.
US Trustee – This is also triggered when fraud is suspected.

What Can Trigger an Objection to Discharge?

Debt from results of breaking the law – If, while driving under the influence, you killed or badly injured someone, any costs incurred (fines, attorney fees, personal injury lawsuits) would not be discharged.
Signs of fraud – If you gifted a family member a substantial amount of money shortly before declaring bankruptcy. Or you charged your credit cards to the max on luxury goods two months before filing.
Lying to the bankruptcy trustee – If you hide any financial documentation from the court.
Paying one creditor but not the others – If you’ve been paying back one debt and ignoring the rest, your other creditors may cry foul.
Confusion on whether the debt can be discharged – there are some debts that fall into legal grey areas (such as some state and federal taxes).

Denial of Discharge vs Denial of the Discharge ability of an Individual Debt

The court can deny either your entire bankruptcy discharge or deny the discharge of a single debt.

Fraud usually triggers a denial of discharge, but it can also happen if you have declared bankruptcy before (within six years of your latest case), or if you have filed a waiver of discharge beforehand.

Individual debts can be flagged by either the trustee or creditors for a number of reasons. The debts could have been declared non-dischargable (student loans, child support, etc…), not listed correctly on the bankruptcy petition and schedules, or not listed in time for the creditor to file a Proof of Claim. Creditors owed a specific debt can also allege that there was fraud or misrepresentation by the debtor in acquiring the loan (such as lying on the loan applications) which would make that particular loan non-dischargeable.

Bankruptcy trustees may object to the entire discharge for all of the debtor’s debts if they felt that the debtor engaged in fraud or misrepresentation during any part of the bankruptcy case.

What Do I Do If This Happens to Me?

This is where having the right bankruptcy lawyer at your side makes all the difference. Your attorney will work with you at the very beginning of the process to make sure all your documentation is updated and correct, which should help negate any chance of mistakenly being suspected of fraud. If you are still hit with an objection to discharge, your bankruptcy lawyer can then begin the process of resolving the objection, mediating with the creditor for a settlement, or prepare to litigate the case before a judge and jury.

What to Do Next

Since there are so many variables, the best option you have is to contact an experienced bankruptcy lawyer to get advice on your particular situation. Reach out to New York bankruptcy attorney Ronald D. Weiss, P.C. for a free consultation. He can tell you what you need to know about the bankruptcy process, and help you get your case started. Call 631-271-3737 and take the first step to a fresh start.