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Creditor's Rights

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Creditors often assume they have no rights upon learning a bankruptcy has been filed.  In fact, creditor's have alternatives for responding to a bankruptcy. Unfortunately they often give up upon learning a bankruptcy has been filed. 

Below are on the most common methods for dealing with a consumer bankruptcy. These issues generally also apply to business cases but creditors should seek counsel for such matters due to the complexities of Chapter 11 Bankruptcy cases. 

Non-Dischargeable Debts
In a Chapter 7 case the debtor wants to discharge as much debt as possible. A creditor may attempt to remove its debt from the discharge by filing a non-dischargeability complaint with the court.

The basis for such a complaint is typically one of the following:

1. the debtor obtained the debt through fraud;

2. the debtor fraudulently conveyed assets; or 

3. the debtor is liable to the creditor for willful/malicious injury.

The debtor's debts are discharged unless the creditor files a complaint within approximately 90 days from the date the bankruptcy was filed. 

 

Objection to discharge
An objection to discharge in a Chapter 7 is a complaint filed by a creditor. If successful, the debtor is denied a discharge of debts.

There are several grounds for objecting to a debtor's discharge, including:
     1. the debtor failed to keep and produce adequate financial records;
     2. the debtor failed to explain satisfactorily a loss of assets;
     3. the debtor made a materially false statement in his bankruptcy papers;
     4. the debtor failed to obey a lawful order of the bankruptcy court; or
     5. the debtor fraudulently transferred, concealed, or destroyed estate property. 

The complaint must be filed approximately 90 days after the bankruptcy case is 

filed. 

Relief from the Automatic Stay
When a bankruptcy petition is filed, an automatic stay goes into effect without the need for judicial action. It stops all actions against a debtor with some limited exceptions. However, if a lawsuit was pending, or if a foreclosure or eviction was about to occur, a creditor may have grounds to request relief from the automatic stay. This is the most common motion filed by creditors. The motion is most often based upon "cause," which may include a lack of adequate protection for the creditor or where the case was filed in bad faith. There could be other grounds as to lift the  stay as well.

No Interest Chapter 13 Plans
In a Chapter 13, some debtors propose a plan with zero percent interest for unsecured creditors. If confirmed, the debtor can discharge debts that could not be discharged in a chapter 7.  However, a creditor can usually get the interest increased or get the case dismissed by showing the plan was not feasible or was filed in bad faith.

There are other methods for creditors to respond to a bankruptcy case. The best alternative depends upon the specific case.