Adversary Cases in Bankruptcy
The bankruptcy code describes categories of debts that are excepted from discharge in a bankruptcy case. For most of these debts, the exception to discharge applies automatically. In other cases, the creditor must file a lawsuit (called an adversarial action or adversary case) with the bankruptcy court and have the judge determine whether the debt will excepted from the discharge order. A debtor may also want the bankruptcy judge to determine whether a debt is excepted from discharge.
Debts described in sections 523(a)(2), (4) and(6) (debts incurred by fraud or malicious conduct) are not automatically excepted from discharge. A creditor or debtor must file an adversary case requesting the bankruptcy court to determine the discharge status of these types of debts. The adversary case is generally filed within 60 days after the first 341 Meeting of Creditors. Failure to file a timely adversary case waives the right to challenge the dischargeability of the debt.
In some rare cases a creditor or the bankruptcy trustee may ask the bankruptcy court to deny the debtor a discharge. Hiding assets, lying during the bankruptcy process, failing to obey a court order, and destroying documents with the intent to defraud creditors are all actions that could result in the bankruptcy court denying the debtor a discharge. In bankruptcy, honesty is not only the best policy, it is the only policy that will get you a discharge.
If an adversary case is filed against you, do not panic. You and your bankruptcy attorney must be served notice of the adversary case and you will have time to answer the complaint. In most cases an experienced bankruptcy attorney will anticipate the adversary case and will discuss options with the client. However, some cases come “out of the blue.” In those cases there is still time to develop a strategy including negotiating a settlement with the creditor.
Discharging Credit Card Balances
As a general rule, credit card debt is among the easiest type of debt to discharge during a Chapter 7 or Chapter 13 Bankruptcy. However, in some cases credit card companies will dispute the discharge of credit card debt by filing an adversarial proceeding against the debtor in the bankruptcy court. The creditor may claim that all or a portion of the debt is non-dischargeable. Debts that are declared non-dischargeable may have to be paid during the bankruptcy, or may survive the bankruptcy altogether.
A credit card company may claim that the debtor committed fraud in obtaining or using the credit card. If the creditor can prove that the card was obtained under false pretenses (i.e. that the application was false), the credit card debt may be declared non-dischargeable because of the fraud.
A credit card company may also claim that charges were placed on the credit card when the debtor had no intention to repay the debt. Additionally, a presumption of fraud arises where luxury goods and services are purchased or cash advances are taken shortly before the filing of a bankruptcy case.
Credit card companies are entitled to notice of a debtor’s bankruptcy case, and these companies monitor bankruptcy cases for signs of fraud. Certain actions send up a red flag including:
- Filing bankruptcy on a new card;
- Taking a cash advance prior to filing;
- Charges for travel or vacation;
- A debt transfer from one card to another;
- Credit charges while unemployed; and
- Charges made after consulting a bankruptcy attorney.
The more time between the credit card activity and the bankruptcy filing, the less likely the charge will cause a discharge dispute. The best advice is: if you are considering bankruptcy, stop using your credit cards. Consult with your bankruptcy attorney regarding the best way to discharge your credit card debt.