When you initiate bankruptcy proceedings, you have to list the debts that you hope to discharge so that the courts can notify your creditors. Depending on the kind of bankruptcy that you file, there might be a repayment plan for some of your unsecured debts.
As you can probably imagine, most companies don’t relish the prospect of an individual discharging a debt instead of repaying it. Could a creditor who holds an unsecured account in your name possibly fight back and ask the courts to exclude the account you have with them from your bankruptcy proceedings and your eventual discharge?
Those owed money can file adversary proceedings during bankruptcy to object to discharge only for certain reasons
Although bankruptcy is a system intended to protect individuals and businesses from financial hardship, the law also includes many protections for financial institutions and those owed money by people seeking a discharge.
One of the rights of lenders and creditors is the right to file an adversary proceeding. They can argue in front of a judge about their right to repayment and why they believe that the debt that they hold should not be part of your discharge. If they have a compelling argument within one of the exceptions to discharge, it’s possible that the judge might decide to exclude their debt from your discharge. Typically for a debt to be nondischargeable, a creditor must prove one of the exceptions apply, like the money was obtained by the debtor through fraud or misrepresentation or the injury was intentionally caused.
Adversary proceedings can benefit the person seeking bankruptcy
Adversary proceedings often benefit creditors and lenders, but they can extend protection to borrowers as well. Specifically, some people can use the special hearings as a way to argue that your student loans represent an undue hardship. That can eventually lead to a discharge of their student loan debt.
Although historically this process has been quite difficult, a recent case out of New York could potentially challenge the frequently made assertion that student loan debt is almost impossible to discharge in bankruptcy. That case is awaiting appeal, so it may be years before the rules regarding student loans change for those filing bankruptcy.
If you worry about a specific creditor challenging your right to a discharge during bankruptcy, getting help early in the process, especially if they request adversary proceedings, can help you get the clean slate you need.