Objections to Dischargeability

Under the U.S. Bankruptcy Code, when a consumer makes cash advances on his credit card within 70 days of filing for bankruptcy, there is a presumption that the debt is non-dischargeable. The purpose of this provision is to prevent consumers from incurring large amounts of debt immediately prior to filing for bankruptcy.

Normally, when a creditor wants to object to the discharge of a debt, it will file an adversary proceeding against the debtor to challenge the discharge. In many situations, consumers don't fight the objection because they cannot afford to pay an attorney to represent them in the adversary proceeding. Most consumer bankruptcy attorneys have retainer agreements that specifically state that defending such a claim is not included in the cost of filing a bankruptcy case.

In order to prevent the abuse of this provision in the Code, Congress added §523(d) to the U.S. Bankruptcy Code. This section states that if a creditor objects to the discharge of a debt that is ultimately discharged, the debtor can collect his attorney's fees from the creditor if the bankruptcy court determines that the creditor's objection was not substantially justified. Since most debtors cannot afford to hire an attorney to defend against these objections, the language of §523(d) is designed to punish creditors who file objections to discharge in bad faith.

In Illinois, bankruptcy courts have held that creditors cannot simply rely on the presumption that a debt is non-dischargeable. Quite simply, a creditor that does not investigate the facts of its case may find itself paying attorney's fees to a victorious consumer. In Discover Bank v. Plaintiff, the U.S. Bankruptcy Court for Central District of Illinois held that a creditor that failed to investigate its claim prior to objecting to dischargeability could not satisfy the "substantially justified" language of §523(d). (Discover Bank v. Plaintiff, 2012 WL 1466786 (C.D. IL 2012)).

The court noted that in order for a creditor to have a substantial justification for objecting to a debt's discharge, three elements must be met: 1) there must be a reasonable basis in law for the objection; 2) there must be a reasonable basis in truth for the facts alleged; and 3) there must be a reasonable connection between the facts alleged and the objection. See Plaintiff, 2012 WL 1466786 at *3. If the facts don't support the legal conclusion, then there is no justification for the objection.

In some situations, the bankruptcy petition filed by the debtor may reveal all of the facts necessary to bring a dischargeability objection. However, the Plaintiff court makes it clear that creditors who object to dischargeability without first investigating the underlying facts of the case are taking a large risk. Creditors are not limited to simply reviewing the petition filed by the debtor.

The Federal Rules of Bankruptcy Procedure provide for what is known as a Rule 2004 examination. All a creditor must do is file a motion and a bankruptcy court will generally approve a 2004 examination of the debtor. In a Rule 2004 examination, creditors may require that a debtor bring documents for review as well. Creditors can also avail themselves of the §341 meeting of the creditors, where creditors are free to appear and ask the debtor questions.

Creditors that fail to take advantage of the investigative tools available to them may discover that what appears to be a non-dischargeable debt is actually dischargeable. This is because the statutory presumption of non-dischargeability is rebuttable with proper proof. In the Plaintiff case, the debtor had consolidated several debts into one by using his Discover card's cash advance. Shortly after doing so, the debtor lost his job and was forced to file for bankruptcy protection.

Without conducting any kind of investigation, Discover Bank filed an adversary proceeding against Mr. Plaintiff objecting to the discharge of his credit card debt. The court noted that had Discover Bank even bothered to review the debtor's petition, it would have seen a sudden drop in income that would have largely explained the circumstances of the filing. Plaintiff at *4. Even more damning for Discover Bank was the fact that its attorney did not even issue discovery requests to the debtor until the debtor had filed a motion for judgment and the bank's response to that motion was due.

If you have filed a bankruptcy and one of your creditors is objecting to the dischargeability of your debt, it may be worth it to fight the claim. When creditors use their considerable financial power to bully consumers, the fresh start contemplated by the Bankruptcy Code is compromised. The only way to stop abusive behavior is to fight it. While lenders may not always understand the human side of things, they always understand money.

Hitting them in the pocketbook can be your best defense and Atlas Consumer Law can help. Contact us to find out how.