Creditors can challenge your ability to legally discharge your debts in a bankruptcy case. These challenges happen more so in bankruptcy cases filed to clean up after the close of a business. Avoid the creditor challenges for a cleaner case.
Bankruptcies filed after the close of a business seem to attract more creditor challenges to the discharge of debts for a number of reasons:
1. The amounts at issue tend to be larger, making litigation more tempting for the creditor.
2. Certain debtor-creditor relationships can become deeply personal, and so when things go badly, can turn very antagonistic. So in debts between ex-business-partners, or between a business owner and his or her financial supporter or investor, or the buyer and the seller of a business, the aggrieved creditor is more reluctant to let the debt be discharged without a fight.
3. For business owners trying to keep their businesses afloat, desperate times call for desperate measures, so they edge into risky behavior that exposes them to future challenge in bankruptcy court.
4. In these kinds of close creditor-debtor relationships, the creditor often knows something about the debtor’s risky behavior, making it more likely to be raised later in court.
On the other hand, when former business owners considering bankruptcy hear that any creditor can raise challenges to the discharge of its debt, they often feel that will inevitably happen in their case. But such challenges are in fact relatively rare, for the following legal and practical reasons:
1. The legal grounds under which challenges to discharge can be raised are relatively narrow. Instead of just proving the existence of a valid debt—as in a conventional lawsuit to collect on a debt—the creditor has to prove that the debtor engaged in behavior such as fraud in incurring the debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to property.
2. In bankruptcy, the debtor files under oath a set of extensive documents about his or her finances, and is also subject to questioning by the creditors about those documents and about anything else relevant to the discharge of the debts. When these documents, along with any questioning, reveal that the debtor genuinely has nothing worth chasing—as is most often the case—this tends to cool the anger of most creditors. Only the most motivated of creditors will be willing to throw the proverbial good money after bad in the hopes of getting nothing more than a questionably collectible judgment.
So in a closed-business bankruptcy case we have these two opposing tendencies—more likely to have challenges to the discharge of significant debts, especially by certain kinds of closely related creditors, but these challenges are still relatively rare because of the narrow legal grounds for them and the financial practicalities involved. It is impossible to predict perfectly something that is largely outside of the control of the debtor. But a good bankruptcy attorney will give you good counsel about this, prepare your paperwork in the best possible way to counter any such challenges, and may even be able to defuse them before they are raised. A dischargeability challenge is very expensive to defend and can turn a relatively simple bankruptcy case into a very involved one. So avoiding one if possible, or positioning well for it if it is raised, are important reasons to have an experienced and conscientious bankruptcy attorney in your corner. That’s all the more true if you have reason to believe that any of your business creditors are in fact considering raising such a challenge.