There’s a lot you can do to help make your “straight bankruptcy” Chapter 7 case a straightforward one, but one thing you don’t control is your creditors’ reactions to it. You’ve heard that creditors can sometimes try to prevent you from discharging (legally writing off) your debts, so naturally you worry about this. Here’s why you should NO’T worry.
Let’s first be clear that I’m not talking here about the kinds of debts that simply can’t be discharged, and don’t require any creditor objection for that to happen—for example, back child and spousal support, many taxes, and criminal fines. Instead I’m talking about the right of any creditor to object to the discharge of its debt, under certain limited circumstances.
You might figure that if your creditors have ANY chance to object to the discharge of their debts, it would jump at the chance to do so. Or at least enough of them would object to cause you trouble. But that is NOT what happens. Most Chapter 7 cases have NO creditor objections at all. Well, why not?
1. The legal grounds for creditors’ objections are quite narrow. They need to have evidence that the debt was incurred through your fraud or misrepresentation, arose out of a theft or embezzlement, as a result of your intentional injury to a person’s body or property, or was related to other similar bad acts. So creditors don’t object to the discharge of their debts simply because most of the time they can’t. No such facts exist.
2. Even within such narrow grounds, relatively common situations such as bounced checks or the use of credit not long before filing bankruptcy can be seen as fraudulent, so creditors may have the legal grounds to object to these kinds of debts. But even in these situations, creditors often do not bother to object because they decide it’s not worth “throwing good money after bad”—spending more of their staff time and/or their money for attorney fees in the hopes of first getting a bankruptcy judge to agree with them, AND then actually getting the debt paid.
3. One of the reasons why sensible creditors decide not to object even when they think they might have the legal grounds to do so is that they risk being ordered to pay your attorney’s fees to defend against their objection. That happens if the judge thinks that “the position of the creditor was not substantially justified.” So creditors risk not only paying their own costs to object, but also paying for your costs for fighting the objection.
So that’s why most creditors just write off their debts and move on.
But there ARE two exceptions.
1. Leverage: Some creditors may be pushier than others in objecting to discharge, figuring that they can bully you into settling quickly because YOU don’t want to pay attorney fees to fight it, EVEN if you have a decent defense. So if one of these creditors sees what on the surface looks like a decent case against you—for example if you wrote a few bounced checks or incurred a debt shortly before the bankruptcy was filed—it may object to the discharge of the debt, counting on the likelihood that you won’t fight back.
2. Axe to grind: If you have someone you owe money to who is simply very mad at you, so that your bankruptcy filing really aggravated him or her, then this creditor might be looking for an excuse to hurt you back. Ex-spouses and ex-business partners are the most common examples. Irrational anger by those types, not reined in by the financial realities, probably causes the messiest objections.
To reduce any anxiety you have about any of this, talk it over thoroughly with your attorney. An experienced one will have an idea who will be the more aggressive creditors. If you have concerns about how you incurred any of your debts, or if someone has threatened you with any trouble if you file bankruptcy, lay it all out. Often, you’ll have less to fear than you think. And if there is a potential problem, being up-front about it may give your attorney a way to reduce the risks for you.
A final bit of good news: creditors have a very limited time to raise objections–generally 60 days after the Meeting of Creditors. So, if your attorneys’ assurances still doesn’t stop you from worrying, you’ll at least know that you can stop worrying after that date.