How Could My Creditor Sue Me, I Filed Bankruptcy (part one)

It is called an Adversary Proceeding.

What you want to get in a Chapter 7 is a discharge, which means you do not have to pay the debt. There are exceptions to discharge, and a creditor can sue you in the Bankruptcy Court asking that you still have to pay the debt.

Always have a written retainer agreement with any attorney you hire, you will probably be charged more to defend a lawsuit filed against you in your Chapter 7 bankruptcy. In Michigan, your bankruptcy attorney does not have to automatically represent you in defending an adversary proceeding. These items, and more, should be covered in any retainer agreement.

One provision creditors use to get their debt excepted from discharge is 523(a)(2) “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by -

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;”

We will address the issue of fraud with respect to written financial statements in a later post.

This provision has to do with verbal mis-statements.

This type of claim must be filed with the Bankruptcy Court within 60 days of your 341 hearing, which is about a month after you file your case. After that, it is too late, unless the Court has entered an Order extending the deadline.

The creditor has to dig into its own pocket to pay the filing fee, and, in Michigan, if it is a corporation, it must hire an attorney.

Bankruptcy law favors granting a discharge, so the burden is on the creditor to prove its case.

Fraud is a mis-representation of a material fact, or failure to disclose a fact you have a duty to disclose, on which a creditor reasonably relies, and which damages the creditor, such as costing it money it lent you.

The creditor must prove each of these elements.

I recently won a trial in which two creditors claimed my clients had committed fraud as defined in this exception.

One of their claims was, that my client said he was experienced in the restuarant business.

Actually, he had said that, and it was true. One creditor claimed he said he had 20 years experience, my client said he had, and said that he had, five years of experience.

The Court found that there was no recognizable difference between a representation of five years or 20 years experience, so it did not have to determine which statement was made. My client said he had experience, and he did have experience.

The Court further found that the creditor did not rely on the statement, that the creditor was relying on other statements about how the credit would be repaid. These other statements were true, so, even if the statement about restuarant experience were a lie, the creditor still loses because it did not rely on that statement.

The creditor has to prove each and every element. It could have relied on a false statement, and extended credit, but been repaid, by the debtor, or someone else.

In that case, there would be a false statement, and reliance, but no damages, so the creditor would still lose.

Creditors have been known to bludgeon debtors with claims under this section, knowing it will cost the debtor more attorney fees to defend such a claim, but filing a baseless claim just to coerce some recovery.

So, Congress added a provision, 523(d), requiring the creditor to pay the debtor’s attorney fees if (1) they file such a suit on a consumer debt, (2) lose, and (3) “if the court finds that the position of the creditor was not substantially justified, ” followed by an exception allowing the Court to let the creditor off the hook if it finds it would be unjust to nail the creditor on that particular case.

This is where hiring the right attorney pays off. You want somebody with an established reputation of standing up for his clients, and getting attorney fees awarded when creditors abuse this provision of the law.