Creditor Challenges to Louisville Bankruptcy Must be Deftly Challenged

When filing for bankruptcy in Louisville, one must be steeled for the possibility that one or more creditors could file a challenge to the action. These are possible to overcome, but you have to be prepared.
While trustees can object to the discharge of certain debts, creditors are more commonly responsible for challenges within a bankruptcy filing. Banks and large corporations usually won’t bother to oppose a debt discharge unless it’s substantial or if there are grounds to believe you are engaged in fraud (i.e., you obtained a loan under false pretenses or racked up a large amount of debt shortly before you initiated the filing).

Most typically for individuals seeking Chapter 7 protection, creditor opposition to discharge will involve smaller creditors, or those who would have more to lose if they aren’t repaid what’s owed.

Such was the case in Adams v. Adams. In this case, the ex-wife of a man seeking bankruptcy protection challenged the discharge of his debts to her through a proof of claim.

This is a document that notifies the bankruptcy court, debtor, trustee and other interested parties about a creditor’s intention to assert rights to receive a distribution from the bankruptcy estate.
The ex-wife purported that some $75,000 in alimony and other debts to her remained unpaid. There had also been several sizable prior judgments made in her favor against the debtor by other courts, stemming from the dissolution of the couple’s joint monster truck business.

However, the bankruptcy court initially rejected the ex-wife’s claim, siding with the husband’s assertion that the state courts had not properly credited him for certain payments that he’d previously made to his former spouse and that the judgments had been obtained under duress. Specifically, the judge noted, “There’s been over $250,000 paid in this case, no question about it, for a marriage that was about 28 months.”

This ruling was appealed. The district court affirmed that finding, allowing that the bankruptcy judge was within his power to inquire as to the validity of the ex-wife’s claim, and that she failed to prove her standing by a preponderance of the evidence.

However, the federal appellate court reversed this finding, concluding that the bankruptcy court was precluded from rehearing the ex-husband’s defenses on the matter. This means that the question of fact or law had already been decided by the other courts. The bankruptcy judge was not within his power to rehear whether the claims against the debtor were valid. Other courts had already decided those issues.

What’s more, while the bankruptcy judge had weighed the total amount that the previous courts had ruled was owed to her, the ex-wife was not seeking duplication of remedies for what she’d already been paid. Further, the debtor could have appealed those earlier judgments, but chose not to do so.

Instead, he filed for bankruptcy. But as the federal appellate court pointed out, bankruptcy is not a substitute for a timely appeal of a state court judgment. Bankruptcy courts can be used to re-hear defenses from an earlier case, the appellate court found.

In turn, the court reversed the earlier rulings and remanded the case for further consideration.

Cases like this reveal why it is important to carefully consider all possible exemptions – and non-exemptions – before filing for bankruptcy protection.

Contact the Louisville bankruptcy lawyers of the Schwartz Bankruptcy Law Center at 866-270-4495 for a free and confidential consultation.

Additional Resources:
Adams v. Adams, Dec. 27, 2013, U.S. Court of Appeals for the Seventh Circuit
More Blog Entries:
Concealing Assets May Result in Dismissal of Bankruptcy Case, Dec. 23, 2013, Louisville Bankruptcy Attorney Blog

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