13 Oct Personal Loans, Revenge and Bankruptcy: Not a Good Combination
You are probably aware that the Bankruptcy Code includes Section 523 which sets out the rules whereby a specific debt can be deemed non-dischargeable in a bankruptcy case. Certain types of debt, such as damages arising from a DUI or past due child support, can never be discharged. Other debts, like student loans can be discharged only in very limited circumstances.
In real life, the most common challenges to a debtorâ€™s bankruptcy comes from credit card companies or other unsecured lenders. So called â€œcredit card bingeâ€ debt serves as the most typical example of abuse of the bankruptcy process – most people would understand why a judge would not allow an unemployed debtor to buy a big screen TV and high end stereo system, then file a bankruptcy six months later, wiping out thousands of dollars of recent charges, while keeping all of his purchases.
Other dischargeability challenge cases may be a little less obvious – for example, an unemployed debtor may use his credit cards to buy food, but also to purchase a new cell phone and to buy movie tickets. In these circumstances, your lawyer will most likely be able to negotiate a reasonable settlement of the challenge, leaving some debt to survive your case but payable under reasonable terms.
Credit card and other vendor challenges can give rise to litigation, but usually in those cases I can see the problem coming and the resolution usually involves a financial settlement.
The more unpredictable challenges to a bankruptcy case are usually not filed by large, corporate lenders. Instead, you may find yourself litigating the dischargeability of debts owed to former friends and acquaintances who challenge the discharge of debt more out of principle than out of desire to actually collect.
Several years ago, for example, I represented a dynamic, well educated business consultant who came to me to file bankruptcy because his former business partner had just won a multi-million dollar judgment against him. It turns out that the dispute between these former partners had been festering for several years and earlier on in the state court litigation, my client had won a large judgment against his partner, and had levied against his former partnerâ€™s business banking account causing several checks to bounce.
My clientâ€™s state court victory was short lived, however, and an appeals court had reversed the judgment and now my clientâ€™s adversary was holding the upper hand. We filed a bankruptcy and the former partner hired a very aggressive and thorough lawyer to contest dischargeability of the judgment debt. During the course of negotiations, the former partner let slip that he did not care if he ever collected a dime – his goal was to see my client and his family homeless and on the street.
The former partner had deep pockets and he was prepared to spend tens of thousands of dollar in bankruptcy court litigation. More importantly, my client had to respond to this litigation and spend thousands of dollars himself in attorneyâ€™s fees.
Obviously not every business or personal dispute reaches this level of personal animosity but a deep pocketed creditor who is driven by motivations other than money can leave you in a very difficult position.
As the bankruptcy filer, you obviously know the back story behind all of your debts much better than your lawyer. If you suspect that a particular creditor might have non-financial motivations, let your lawyer know. You may find that bankruptcy is not the best venue to address the dispute and that your lawyer can use the leverage of a possible bankruptcy to re-open negotiations.
If bankruptcy does turn out to be the best option then your lawyer can be sure to document every claimed expense and prepare your pleadings for a likely challenge.
Jonathan Ginsberg, Esq.
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