One of the principal purposes of bankruptcy is to provide an “honest but unfortunate debtor” with a fresh start and a new opportunity in life, free from the burden of debts. In exchange, the debtor must surrender their non-exempt property for the benefit of their creditors. To be sure, most people who file for bankruptcy fit easily within the category of “honest but unfortunate.” Most people intend to pay their debts when they incur them and make an honest effort to do so. Life circumstances often get in the way of people’s best-laid plans: a job loss, illness, divorce, and many other events can lead a person to seek bankruptcy protection. But, unfortunately, a small minority of people are ineligible to discharge some or all of their debts, either because of the manner in which they incurred the debt or because they failed to honestly and accurately disclose their assets and financial situation in their bankruptcy filing.
The Bankruptcy Code reflects a public policy that people should be allowed a way to get a fresh start in life freed from the burdens of their creditors so they could go on to again be productive members of society. However, certain types of debts associated with dishonesty, fraud, or ill intent may be excluded from a bankruptcy discharge. Debts that can be excluded from bankruptcy include those arising from fraud, embezzlement, theft, breach of fiduciary duties, and injuries intentionally caused to another person or their property. These types of debts are excluded from discharge in bankruptcy, but only where the creditor can prove that their debt fits into one of the excluded categories. In some cases, it is clear that a debt should be excluded from bankruptcy (i.e. medical bills arising from an intentional assault or an employee stealing funds) but in many, there is a legitimate dispute about whether a particular debt should be excluded from bankruptcy (i.e. a contractor who failed to complete a renovation project after spending the deposit or an acrimonious break up among business partners).
A person can also be denied a discharge completely if the Bankruptcy Court determines that they have failed to accurately disclose their assets, intentionally attempted to conceal assets, or have been uncooperative in the administration of their bankruptcy case. Objections to discharge on this basis can be brought by any creditor but also by the Office of the United States Trustee, a division of the U.S. Justice Department which oversees bankruptcy filings. In severe cases, although rare, criminal charges can also be brought for bankruptcy fraud.
In order to have debts excluded from bankruptcy or to have a discharge denied entirely, creditor or United States Trustee must file an action in the bankruptcy court called an “Adversary Proceeding”. Adversary proceedings are similar to civil lawsuits only instead of trying to prove one party is liable to the other, the creditor must prove that the liability fits within one of the exemptions. The grounds for excluding a debt from bankruptcy are very specific and the burden is on the creditor challenging the discharge of their debt to prove their debt should fit the criteria.
At Lipton Law Group, we advise our clients before filing and throughout the process, of any to mitigate the chances there will be an objection to discharge. However, where objections to discharge do arise, we have the knowledge and experience necessary to overcome them. If you are considering filing bankruptcy but are concerned about whether your debts qualify for discharge, contact us right away for a free case evaluation.