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Bringing a Claim for Non-Dischargeability in a Business Bankruptcy

Protecting a creditor’s right to payment during a business bankruptcy often involves filing a claim for non-dischargeability. Claims for dischargeability can focus on protecting an individual claim, or, in some cases, they can focus on preventing the business debtor’s discharge entirely. In both scenarios, creditors bringing claims for non-dischargeability must follow a specific set of steps and adhere to several stringent procedural requirements.

Bringing a claim for non-dischargeability is a unique process that can initially seem very confusing. Even though a business debtor’s bankruptcy is itself a legal proceeding, bringing a claim for non-dischargeability involves initiating a separate legal proceeding in the bankruptcy court. There are several challenging issues involved, and even simple procedural mistakes can prevent creditors from protecting their claims. As a result, skilled legal representation is required, and creditors seeking to bring claims for non-dischargeability need to work with an experienced creditors’ rights attorney.  

7 Major Steps to Bring a Claim for Non-Dischargeability

While bringing a claim for non-dischargeability is a complex process, the process can largely be broken down into seven major steps. These steps are:

1. Collecting All Relevant Documentation

To begin the process of protecting their claims from discharge, creditors should gather all relevant documentation that they have. This includes any and all documentation that evidences the business’s debt. It also includes application forms, financial records received from the business, letters and emails, text messages, and all other forms of communication with the business’s principals or representatives.

2. Evaluating Potential Grounds for Non-Dischargeability

After collecting this documentation, creditors will need to work with their counsel to evaluate all potential claims for non-dischargeability. There are several grounds for preventing discharge—whether of an individual claim or of the debtor as an entity. Examples of these grounds include the following under Section 523 and Section 727 of the U.S. Bankruptcy Code:

  • Failing to list the creditor’s debt in the debtor’s bankruptcy filing
  • Obtaining credit through false pretenses
  • Obtaining credit through fraud
  • Owing a debt due to embezzlement or larceny
  • Owing a debt due to “willful or malicious” injury
  • Conducting a fraudulent transfer
  • Destroying or falsifying records
  • Engaging in knowing and fraudulent conduct in connection with the debtor’s bankruptcy
  • Refusing to comply with a court order
  • Engaging in fraud in connection with a previous bankruptcy filing

Each of these grounds for non-dischargeability has its own unique set of “elements” that a creditor must prove in order to protect its right to payment. For example, many claims for non-dischargeability involve allegations of fraud under Section 523(a)(2)(A) or (B) of the U.S. Bankruptcy Code. In order to prove fraud under these statutory provisions, a creditor (or the creditor’s counsel) must have evidence that proves each of the following elements:

  • The debtor made a false representation;
  • The debtor knew that the representation was false at the time it was made;
  • The debtor made the representation with the intent and purpose of deceiving the creditor;
  • The creditor relied on the debtor’s false representation; and,
  • The creditor extended credit to the debtor as a proximate result of the debtor’s false representation.  

Some grounds for discharge have more elements than others, and some are more difficult to prove than others. In many cases, it will not be possible to fully prove a claim for non-dischargeability until conducting discovery. But, with the right facts and the necessary evidence, creditors can potentially use any one (or more) of the grounds listed above to support a claim for non-dischargeability.

3. Developing a Case Strategy

After evaluating all potential grounds for non-dischargeability, the next key step is to develop a case strategy. While a kitchen-sink approach will make sense in some cases, oftentimes it will be more effective to focus on just one or a few grounds. If a creditor can prove even a single ground for non-dischargeability, this is enough. So, while it might seem prudent to fight to protect a creditor’s claim by all means available (and this will be prudent in some cases), a simpler approach focused on clearly proving one ground for non-dischargeability could be the best option.

4. Initiating an Adversary Proceeding

As we discussed above, bringing a claim for dischargeability involves initiating a separate legal proceeding. This is known as an adversary proceeding. The creditor (or the creditor’s counsel) must file a complaint in bankruptcy court, and the complaint (along with a summons) must be served on the debtor within 120 days.

5. Conducting Discovery and Meeting the Initial Burden of Production

After initiating an adversary proceeding, the creditor (or the creditor’s counsel) will need to conduct discovery. Here, the focus is on obtaining relevant documents and securing interrogatory responses and testimony that help to establish the creditor’s non-dischargeability claim. When pursuing an adversary proceeding, the initial burden of production rests with the creditor. This means that the creditor’s counsel must be able to use the available evidence to establish each element of the creditor’s claim by a preponderance of the evidence.

6. Responding to the Debtor’s Defenses and Objections

Concurrently with conducting discovery, the creditor’s counsel will need to respond to the debtor’s defenses and objections. When seeking relief under Chapter 7 or Chapter 11, business debtors will often (and understandably) vigorously dispute creditors’ claims for non-dischargeability.

7. Going Through the Litigation Process

Successfully pursuing a claim for non-dischargeability involves going through the litigation process—potentially all the way through trial. Crucially, however, when pursuing a non-dischargeability claim, a creditor’s counsel must also remain focused on the debtor’s underlying bankruptcy case. In the event that the creditor’s non-dischargeability claim proves unsuccessful, counsel will need to ensure that the creditor remains in as strong a position as possible to protect its interests in the debtor’s bankruptcy.

Discuss Your Options with a Creditors’ Rights Attorney in Miami or Fort Lauderdale

If you need to know more about bringing a claim for non-dischargeability in a business bankruptcy case in Florida, we invite you to get in touch. To schedule an appointment with a creditors’ rights attorney at our law offices in Miami or Fort Lauderdale, please call 305-768-9909 or contact us online today

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