FACT: In bankruptcy, creditors seldom fight the write-off of their debts. Why not? And when DO they tend to fight?
Debts That Creditors Must Object To
This blog post is NOT about the kinds of debts that simply can’t be discharged (legally written off), and don’t need the creditor to object for that to happen. Examples of those are child and spousal support obligations, recent income taxes debts, and criminal fines. Those survive bankruptcy without any effect on them.
Instead this is about ordinary debts and the ability of any creditor to raise certain limited kinds of objections to the discharge of its debt.
As you consider whether or not to file bankruptcy, you might be wondering whether doing so would be effective—whether you will succeed in discharging your debts so you no longer have to pay them. And you might also wonder whether it would be emotionally difficult—whether the creditors would give you a bad time and try to make you feel guilty for not paying your debts.
As indicated at the beginning of this blog post, creditors will very seldom raise objections to discharging their debts. So your bankruptcy case will likely result in the discharge of all the debts you expect to discharge, usually without even hearing from most or all of your creditors about it. So your bankruptcy will in most cases be effective and not contentious.
Why Objections Aren’t Usually Raised
But if creditors have a right to object, why don’t they do so? If they can make trouble for you, why don’t they?
Simply because doing so is very seldom worth their trouble.
1. Creditors seldom have the factual basis on which to object.
The legal grounds for creditors to object to the discharge of their debts are quite narrow. They need to present evidence that you incurred the debt through fraud or misrepresentation, by theft or embezzlement, by your intentional injury to a person’s body or property, or through some other similar bad act. The biggest reason that creditors don’t raise objections to the discharge of their debts is that they seldom have grounds to do so.
2. It takes money for creditors to object, money they may well not recoup.
Creditors sometimes do have factual grounds to object, for example in relatively common situations such as bounced checks or the use of credit without the intent to repay (just before filing bankruptcy). But even in these situations, creditors often don’t object because they decide it’s not worth the risk that they would just spend more money on objecting without doing any good. They often don’t want to risk spending more money to pay for their staff and for attorney fees only to have the bankruptcy judge decide that the required grounds for objection have not been met.
3. The risk that the creditor would have to pay your attorney fees.
One of the reasons why sensible creditors decide not to object unless they are very confident that they have the grounds to do so is that they risk being ordered to pay your attorney’s fees for defending against their objection. That would happen if the judge decided that “the position of the creditor was not substantially justified.” So if creditors are not very confident of their argument, they could be dissuaded further by the risk of having to pay your costs fighting the objection.
So that’s why most creditors just write off the debt and you hear nothing from them during your bankruptcy case.
When Creditors Tend to Object
Creditors do object sometimes, often involving one of the following two situations:
1. Using leverage against you.
If a creditor thinks it has a sensible case against you, it could raise an objection knowing that you are not willing or able to pay a lot of attorney fees to fight it. The creditor knows that even if you have a good defense to its accusations so that you could well win if the matter went all the way to trial, it would cost you a lot to get to that point. So they raise the objection in hopes of inducing you to enter into a settlement quickly.
2. A Personal Grudge
If a creditor is very angry at you for some reason, he, she, or it might be looking for an excuse to harm you or cause you problems. Ex-spouses and ex-business partners are the most common creditors of this sort, but sometimes more conventional creditors find some reason to pick on you. Irrationality is unpredictable, so it sometime drives an objection even when there are little or no factual grounds for it.
The Creditors’ Firm Deadline to Object
Creditors have a very limited time to raise objections: their deadline is only 60 days after the Meeting of Creditors (so around 3 months after your bankruptcy case is filed).
So, talk with your attorney if you have any concerns along these lines. And then if whatever assurances he or she gives you doesn’t stop you from worrying about this, you’ll at least know that you won’t have long to worry before the creditors’ right to object expires.