Author: Spiros Avramidis
Most individual debtors file bankruptcy expecting to discharge most, if not all, of their debts. There is, however, no absolute right to receive a discharge. Although a general discharge is granted in most filed cases, all debts are not necessarily discharged. Some debts cannot be discharged statutorily under Section 523. In those instances the creditor need not take any action. Certain other debts described in Section 523 are excepted from discharge, but only if the creditor brings a timely law suit—called an adversary proceeding—against the debtor. The lawsuit will seek a ruling from the court that the debt should not be discharged. A creditor with such a claim should be aware of their right to challenge discharge of their claim.
Failure to timely file the adversary proceeding will result in the debtor receiving a discharge of the debt notwithstanding the creditor potentially having a meritorious non-dischargeability claim. The adversary proceeding must be commenced within 60 days from the first meeting of creditors. That meeting typically takes place 30-45 days from the filing of the bankruptcy petition. Three enumerated categories of debts are discharged unless an adversary proceeding is timely filed. Broadly speaking, all three categories are debts arising from a debtor’s intentional wrongful acts.
The first category under 523(a)(2) excepts from discharge debts procured by false pretenses, false representation, actual fraud, or false writing related to the debtor’s financial condition. Example: Debtor willfully enters into multiple agreements to sell the same car, knowing that the car cannot actually be sold to more than one person, takes down payments, and then files bankruptcy. The duped creditors likely have a successful non-dischargeability claim against the debtor for return of the down payments, and possibly more, because the debtor procured the down payments through fraudulent conduct (this example also raises other issues).
The second category under 523(a)(4) excepts from discharge debts procured by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. Example: Debtor is the trustee of a family trust who transfers all funds in the trust to his personal account and uses the money for his own personal gain, none of which is authorized by the trust agreement. This defalcation and breach of fiduciary duty would be the basis of a successful non-dischargeability action.
The third category under 523(a)(6) excepts from discharge debts stemming from a willful and malicious injury. This typically arises from intentional torts. Example: Debtor without provocation or excuse intentionally punches Joe in the face causing extensive injury; Joe sues and obtains a money judgment against debtor for battery. Joe has a non-dischargeability claim against the debtor because the debt arises from the debtor’s willful infliction of injury upon Joe.
If a creditor receives a notice of bankruptcy, the creditor should not ignore it. Creditors have rights in bankruptcy. The failure to timely assert those rights can result in debts being permanently discharged that could otherwise survive the bankruptcy. Consult with a bankruptcy attorney to learn your rights as a creditor.
The first category under 523(a)(2) excepts from discharge debts procured by false pretenses, false representation, actual fraud, or false writing related to the debtor’s financial condition. Example: Debtor willfully enters into multiple agreements to sell the same car, knowing that the car cannot actually be sold to more than one person, takes down payments, and then files bankruptcy. The duped creditors likely have a successful non-dischargeability claim against the debtor for return of the down payments, and possibly more, because the debtor procured the down payments through fraudulent conduct (this example also raises other issues).
The second category under 523(a)(4) excepts from discharge debts procured by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. Example: Debtor is the trustee of a family trust who transfers all funds in the trust to his personal account and uses the money for his own personal gain, none of which is authorized by the trust agreement. This defalcation and breach of fiduciary duty would be the basis of a successful non-dischargeability action.
The third category under 523(a)(6) excepts from discharge debts stemming from a willful and malicious injury. This typically arises from intentional torts. Example: Debtor without provocation or excuse intentionally punches Joe in the face causing extensive injury; Joe sues and obtains a money judgment against debtor for battery. Joe has a non-dischargeability claim against the debtor because the debt arises from the debtor’s willful infliction of injury upon Joe.
If a creditor receives a notice of bankruptcy, the creditor should not ignore it. Creditors have rights in bankruptcy. The failure to timely assert those rights can result in debts being permanently discharged that could otherwise survive the bankruptcy. Consult with a bankruptcy attorney to learn your rights as a creditor.
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