Yes, Creditors Sometimes Challenge The Discharge of Debts

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Filing for a Chapter 7 bankruptcy can be one of the smartest financial moves a person can make when facing unmanageable debt.

A Chapter 7 filing allows debtors to effectively “wipe the slate clean,” and start over. Many people who complete the process wonder why they didn’t do it sooner.

Still, our Washington D.C. bankruptcy attorneys want to prepare clients and potential clients for the possibility that creditors sometimes challenge the discharge of debts. That is, they file a request with the court, asking that you still be made legally responsible for paying the debt owed to them. There are limited grounds on which they can legally do so, but they are sometimes successful. An experienced bankruptcy attorney can help prepare you for this possibility, based on the facts of your case, and develop effective strategies to counter such efforts.

In the recent case of Heide v. Juve, the U.S. Court of Appeals for the Eighth Circuit, the issue of contention was $300,000 in loans the debtor’s business partner alleged were falsely obtained and then squandered. The business partner asserted that a discharge of the debtor’s obligation would have made him solely responsible, and he requested intervention from the court.

According to court records, the debtor worked during the 1990s and 2000s as a seller of cars, specifically vehicle imports. In 1996, he and the complainant began working together at the same company and became close friends.

Due to a prior bankruptcy, the debtor’s credit wasn’t good enough to obtain traditional financing for vehicle purchases. Starting in 1998, the complainant agreed to help him purchase vehicles for resale on the import lot. He began with loans that would cover a single vehicle purchase and resale at a time.

The debtor paid regular interest on those loans until the vehicle was sold, and the complainant received 10 percent return on his investment once the vehicles were sold.

In 2001, the debtor became a 75 percent owner of the import business. In need of more capital, he asked the complainant to fund several cars at a time, in return for monthly interest payments and commission on every car sold. The complainant agreed, and disbursed a total of $300,000 to the debtor for this purpose. The debtor assured the complainant that he owned the cars on the lot and the inventory was sufficient to secure the loan.

In 2006, the business began to fail. All of the complainant’s investment was lost, though the debtor could never fully explain how. The complainant did not learn of this until late 2008. The complainant then met with the debtor in early 2009, and accused him of “stealing” his life savings. The debtor promised it was not intentional, and he intended to pay him back.

The complainant insisted the debtor sign a document indicating he borrowed $300,000, and conceded the debtor’s liability for those loans.

Several months later, the debtor and his wife filed for Chapter 7 bankruptcy.

The complainant and his wife then filed an adversary proceeding, asking the court to find the debt to him non-dischargeable under 11 U.S.C. 523(a)(2), (4) or (6). The bankruptcy court granted a summary judgment in the complainant’s favor for $400,000, finding the loan had been obtained under false pretenses.

However, the Bankruptcy Appellate Panel reversed the bankruptcy court and the case was remanded. Upon remand, the bankruptcy court found a judgment in favor of the complainant for $360,000. The debtor again appealed to the appellate panel, and the court’s decision was again reversed, with the panel finding the bankruptcy court “clearly erred in its factual findings.” The panel indicated there was not enough evidence to support the assertion the debtor had made fraudulent representations regarding the security of the loans.

The complainant appealed, and the federal appellate court reinstated the original ruling of the bankruptcy court.

This case involved extensive back-and-forth, and although the debtor was ultimately unsuccessful, it shows that creditors do face an uphill battle in staking such claims. That’s because the creditor is the party who bears the burden of proof to show, by a preponderance of the evidence, that the debt should not be discharged. Still, it behooves the debtor to be able to make a strong case, based on careful legal analysis, for why the claim should be denied. We can help.

Contact Harris S. Ammerman, bankruptcy attorney serving Washington D.C., Maryland and Virginia, by calling (202) 638-0606.


Harris Ammerman
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