Can A Creditor Challenge A Debtor’s Right To The Entire Discharge If The Debtor Has Defrauded The Creditor Or Court?

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Normally, creditor challenges are challenges to the discharge of a particular debt. However, a creditor can challenge the entire discharge.

For reference:

• Challenges to the discharge of a particular debt are pursued under Section 523 of the Bankruptcy Code.
• In a Chapter 7 bankruptcy, a discharge is issued under Section 727 of the Bankruptcy Code.
• In a Chapter 11 bankruptcy, a discharge is issued under Section 1141 of the Bankruptcy Code.
• In a Chapter 13 bankruptcy, a discharge is issued under issued under Section 1328 of the Bankruptcy Code.

While a creditor can certainly challenge the entire discharge of debt in a bankruptcy case based on fraud, it is probably not going to challenge the entire discharge if the fraud was against just that creditor. Instead, the creditor will initiate a § 523 action to challenge the discharge of the particular debt owed to the creditor.

However, a creditor might challenge the entire discharge if it believes it can prove the debtor committed fraud on the court with a pattern of malfeasance. In essence, the creditor must prove that the debtor scammed the bankruptcy system and the court.

There are potential dangers in this for the creditor. A § 523 action can be settled without involving any creditor other than the one that initiated the adversary proceeding, because the action was just between the debtor and that particular creditor.

With a § 727 action, it’s not so simple since the creditor’s adversary proceeding affects all the other creditors. If the creditor and the debtor settle the § 727 action, the other creditors must be given an opportunity to prosecute the § 727 action.

As a consequence, when a creditor initiates a nondischargeability action, it’s typically going to be under § 523 rather than under § 727 or § 1141.

In Chapter 13 bankruptcy, the nondischargeable debt list is a bit shorter. It does include some of those debts that are listed in Section 523, but there are some that are not listed in Chapter 13. We have touched on these differences in earlier articles. To recap, some of these include:

• Debts incurred by willful and malicious harm to property
• Nondomestic support debts (i.e., debts that are not child support or alimony) to a spouse or ex-spouse that were incurred during a divorce decree or separation agreement.

So, in brief, creditors can certainly challenge the entire discharge of a person’s debt, but there really has to be a good reason to do it. If there isn’t a compelling enough reason, a § 727 action is too high-risk and low-reward to make it worthwhile.

Unfortunately, as with nonbankruptcy litigation, some people are motivated more by anger than by legal principle. This is especially true in divorce proceedings. It is common to see divorce cases where the parties are willing to destroy themselves just to harm the ex-spouse. These actions tend to be emotive rather than logical, and are motivated primarily by bitterness and anger.

When justifying their actions in court, whether in divorce court or bankruptcy court, lots of people like to say that it “really isn’t about the money,” it’s “the principle.” In truth, most of the time, it’s more about the money than anything else. However, occasionally, someone will engage in some really self-destructive behavior just to harm the other party. Unfortunately, I have occasionally seen this happen in bankruptcy, though I think it happens less frequently there than it does outside of the bankruptcy system.

In sum, in certain circumstances a creditor can challenge a debtor’s right to the entire discharge.

If you are a creditor looking for more information on Challenging A Debtor’s Right To The Entire Discharge, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.