Bankruptcy is a technical process that assumes everyone working within it is mostly rational. To the extent that it expects parties to deviate from irrational behavior, the Bankruptcy Code and its accompanying rules include incentives to keep parties in line. Creditors are usually large and impersonal, and they rarely care if their debtors file bankruptcy. They just write off the losses and move on. Trustees, too, aren’t so motivated to hunt for assets that they’ll boil the oceans looking for things debtors clearly don’t own. That isn’t always true, however. Sometimes creditors are not so rational, and in those circumstances New York bankruptcy may not save debtors from vicious personal disputes involving debt. In those cases, not filing bankruptcy might be the best course of action.
To be clear, in many circumstances personal debts cause the opposite problem. Debtors owe money to people whom they want to repay. In those situations, the solution is to simply try and repay them after bankruptcy. The debt may have been discharged, but that doesn’t prevent the debtor from repaying the creditor. What sometimes happens is debtors try to repay those creditors before bankruptcy, creating preference payments that the trustee can avoid.
But sometimes the debt originates in a personal dispute. Often it’s a business partnership that’s failed, but there can be other causes, like family obligations or even fights between neighbors. The creditor sues the debtor, obtains some kind of judgment, possibly after a trial, and then demands payment just like any other creditor. The difference though is that while most other creditors are deterred by a bankruptcy filing (certainly by the automatic stay), the hostile personal creditor simply takes the dispute into bankruptcy court and keeps the pressure on. If the creditor is already well heeled, then the legal expenses are no obstacle.
The creditor will use all its means to frustrate the debtor’s bankruptcy, chief among them being a challenge to the dischargeability of the debt. Even though the creditor might be aggressive, that doesn’t mean he or she doesn’t have a case. For example, if the creditor’s judgment is based on willful and malicious conduct, a bankruptcy judge will simply adopt the facts underlying the state-court judgment because of the doctrine of “collateral estoppel,” which means courts won’t rehash issues that were validly decided by other courts. Then the bankruptcy court will rule that the debt is nondischargeable.
Thus, while a simple chapter 7 bankruptcy case can only cost several hundred dollars, a contested one can easily rack up attorneys’ fees as one party tries to bleed the other dry in adversary proceedings.
The moral is that bankruptcy is often no refuge from creditors who are no longer rationally concerned with minimizing their losses. If they no longer care about money, they may be perfectly willing to bankrupt themselves to prevent you from using bankruptcy protection. Consequently, if you are considering bankruptcy and you have a difficult personal creditor, then it is especially important to discuss your situation with an experienced New York bankruptcy lawyer because bankruptcy might not be a good option.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.