Disputed issues in bankruptcy cases are sometimes resolved in an adversary proceeding. This is a case within the case and can be brought by the person filing for bankruptcy, by the trustee or by a creditor. A common type of adversary proceeding arises from creditors’ objections to discharge of certain debts on the grounds that they were incurred through fraud, breach of a fiduciary duty or some malicious means.
A creditor objecting to discharge of a debt based on alleged fraud must show that the debtor made a false representation intentionally. In other words, they must have known that they were making a false statement at the time. Also, the creditor must show that the debt was incurred due to reliance on the false statement. If the debt would still have been issued even without the false representations, then a creditor will not typically succeed on such a claim.
Creditors claiming that a breach of trust or confidence created the debt must establish an actual fiduciary duty. An implied fiduciary relationship will not be sufficient. Examples of actual fiduciary duties are those of a professional, such as lawyer, accountant or real estate agent. There are other types of fiduciary relationships, such as the one between a homeowner association’s directors and the HOA members. If the fiduciary duty is established, and the breach of trust is what led to the debt, then the debt may be found nondischargeable.
A creditor objecting to a debt on the ground that it was obtained by malicious means must show that an intentional tort was committed. That is, an act was committed with the intent to injure or with reckless disregard for the well-being of the debtor. Simply showing that the act itself was intentional will not be enough to allow a creditor to avoid a discharge.
An adversary proceeding can be filed in a Chapter 7 or Chapter 13 bankruptcy. The case is decided by the bankruptcy judge assigned to the main case, without a jury. Such proceedings are often settled through negotiation, sometimes by agreement to eliminate a portion of the debt in question. Any settlement must be approved by the judge, and a party disagreeing with the approval can appeal.
Jeff Field & Associates assists clients facing Chapter 7 and Chapter 13 bankruptcy cases in Georgia. Our office has locations in Athens, Douglasville, Gainesville, Lawrenceville, Marietta and Scottdale. Reach out to us by telephone at 404-381-1278 or contact us online to schedule your free initial consultation.