LAWDOG BANKRUPTCY: CHAPTER 11

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Under Bankruptcy Rules Rule 7001, an adversary proceeding may be filed in a debtor's bankruptcy action for certain specific reasons. An adversary proceeding may be filed to recover money or property of a debtor, for the sale of a debtor's property by a co-owner, to object or revoke a discharge, to revoke the confirmation of a reorganization plan, to determine the dischargeability of a debt, to obtain an injunction or other equitable relief, and for other matters. See Rule 7001 reproduced here for illustration purpose only.

Creditors also may initiate adversary proceedings to determine the validity or priority of a lien, to determine the validity of a debt, to obtain an injunction, or to subordinate a claim of another creditor. The debtor in possession may institute an adversary proceeding to recover money or property for the estate. A creditors' committee may be authorized by the bankruptcy court to pursue certain actions which the debtor has failed to pursue.

"Nondischargeable" Debts

The Chapter 11 confirmation may discharge debtor from all debts prior to confirmation, debts arising from the rejection of executory contracts or unexpired leases, and certain other items The confirmation of a Chapter 11 plan does not discharge an individual debtor from any debt excepted from discharge under Section 523. A creditor may file an adversary proceeding to object to the discharge of a specific debt which qualifies.

Claims Which Are Generally "Nondischargeable"

Certain debts of an individual debtor may be "non-dischargeable" under Section 523 of the Bankruptcy Code. Section 523 provides that a discharge generally does not discharge certain taxes or customs duties, certain spousal or child support obligations, or fines, penalties, or forfeitures to a governmental unit. In addition, certain student loans, death or personal injury caused by debtor while intoxicated, and a debt to which the debtor waived, or was denied, a discharge in a prior case may be "non-dischargeable". See Section 523 reproduced here for illustration purposes only.

Claims Which May Be Found To Be "Nondischargeable"

Certain other types of claims may be found to be nondischargeable under Section 523. Provided that the debtor has properly scheduled the debt and provided notice of the Bankruptcy, these types of claims are discharged unless the claimant timely files a proof of claim, and timely files a complaint for a determination of dischargeability of such debt. Debts that are for fraud while the debtor was acting as a fiduciary, embezzelment, or larceny are listed in this category. Also included are willful and malicious injuries and certain property damage caused by the debtor.

The section which may be of most interest to creditors is Section 523 (a) (2).

Section 523 (a) (2) provides that a claim may be found, by the court, to be nondischargeable by an individual debtor, for any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by use of a materially false written financial statement respecting debtor or an insider, on which the creditor reasonably relied, and that the debtor caused to be made with intent to deceive. A claim may be found, by the court, also under Section 523 (a) (2), to be nondischargeable by an individual debtor, for any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud. See Section 523 (a) (2) reproduced here for illustration purposes only.

Where consumer debts for "luxury goods or services"owed to a single creditor or cash advances on a credit card or other open end credit plan, aggregating more than $1,000, are incurred by an individual debtor, on or within 60 days before the Bankruptcy filing, these items are presumed to be nondischargeable. "Luxury goods or services" do not include goods or services reasonably acquired for the support or maintenance of the debtor or a dependent of the debtor; an extension of consumer credit under an open end credit plan is to be defined for purposes of this subparagraph as it is defined in the Consumer Credit Protection Act. See Section 523(a)(2)(C) reproduced here for illustration purposes only.

Strict Time Limits

A creditor may file an adversary action to object to the discharge of a specific debt. If the creditor prevails, the debt or claim is declared to be non-dischargeable by the Bankruptcy Court, and the creditor may attempt to recover the debt under state laws which may apply. The bankruptcy law, however, provides a very short time period for the filing of an adversary action to determine the dischargeability of a debt.

Under Bankruptcy Rules Rule 4007, a debtor or any creditor may file a complaint to obtain a determination of the dischargeability of any debt. In a Chapter 7, 11, or 12 case, a complaint to determine the dischargeability of any debt pursuant to Section 523(c) must be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to Section 341(a). The court must give all creditors not less than 30 days notice of the time. On motion of any party, after hearing on notice, the court may for cause extend the time, but the motion must be made before the time has expired. See Bankruptcy Rules Rule 4007 reproduced here for illustration purposes only.

A creditor who believes a particular debt should not be discharged should consult legal counsel immediately upon receiving any information of the filing of a bankruptcy by a debtor. Actual cases should be discussed with your actual legal advisor or legal department.

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