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
In Illinois, bankruptcy courts have held that creditors cannot simply rely
on the presumption that a debt is nondischargeable. 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.
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 my discover that what appears to be a nondischargeable debt is
actually dischargeable. This is because the statutory presumption of nondischargeability
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 Sulaiman Law
Group, LTD. can help. Contact us to find out how.