Not all debts are dischargeable in bankruptcy. The key is to know which claims can be exempted from discharge and then what steps you, as a creditor, need to take to preserve your non-dischargeable claim.
First — Determine if your Claim is Secured or Unsecured:
It is important to know if your claim is secured or unsecured. You likely have a secured
claim if one or more of the following apply:
- You hold a mortgage against real estate of the Debtor:
- You have a filed UCC-1 and a security interest in personal property of the Debtor;
- You have a judgment in Pennsylvania which has been used to properly levy on personal property (such as bank accounts); or
- You have a judgment in Pennsylvania that has been properly docketed in a county where the Debtor owns real estate.
There are some exceptions to the above; but generally speaking, if any of those items apply then you have a secured claim. Your claim may still be partially or wholly unsecured if any other creditors hold superior claims in the item securing the debt and/or the value of the collateral is less than your claim. In those instances, the debtor may be able to file a motion or an adversary proceeding, to attempt to have your claim marked as wholly or partially unsecured.
The secured portion of the claim will remain valid against the collateral to the extent there is enough equity to cover your claim. If the debtor stops paying you may take steps to liquidate the collateral after obtaining relief from the automatic stay. It is important to understand that while the debt remains secured by the collateral, the debtor’s personal obligations will be extinguished if the Debtor receives a discharge in bankruptcy. That means that if the property is ever foreclosed on and sold, and the amount received by the creditors is less than the amount owed, there is no recourse against the debtor for the deficiency.
Second — Determine if your Claim falls into a non-dischargeable Class:
If your claim is wholly or partially unsecured, then it will likely be discharged when the bankruptcy is complete. We often get asked if there is any way to avoid having an unsecured claim discharged. While generally the answer is “no”, there are some exceptions. The following are some (but not all) of the reasons that a debt held by a non-government creditor can be considered non-dischargeable:
- When the debtor obtained money, property, services or credit as a result of false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
- When the debtor obtained money property, services or credit by use of a written statement of the debtor that was materially false, respecting the debtor’s or an insider’s financial condition, on which the creditor reasonably relied and that the debtor caused to be made with the intent to deceive the creditor;
- For consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the bankruptcy filing;
- For any debt that is incurred as a result of fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
- For any debt that is a domestic support obligation: and/or
- Any debt for willful and malicious injury by the debtor to another entity or to the property of another entity.
If any of the above situations apply then the creditor can request the bankruptcy court make a determination that the debt is not dischargeable in bankruptcy. Generally, a creditor needs to affirmatively request that the court enter an Order finding that a claim is not dischargeable. If the creditor does not request a determination of non-dischargeability, then the claim is usually presumed discharged. Understand that there is a strong preference under bankruptcy law to avoid classifying a claim as non-dischargeable. Bankruptcy courts impose very difficult standards for a claim to be classified as non-dischargeable. In addition, careful consideration should be taken before requesting that the bankruptcy court review the dischargeability of your claim. If a creditor challenges dischargeability related to a consumer debt and the creditor loses, the court can award costs and attorneys’ fees against the creditor and in favor of the debtor.
However, in instances where a claim may fall into one of the above categories the creditor should speak to a bankruptcy attorney as soon as possible. There are time limits placed on when a creditor can file to have the court determine dischargeability. Creditors that have claims meeting the non-dischargeable criteria should exercise their rights and protect their claim by working with an attorney that is familiar with bankruptcy.