"What happens if a creditor rejects my bankruptcy case?"

The bankruptcy process can devolve into a complicated series of forms, procedures, hearings and deadlines.  The average American consumer is as likely to know the basic rules of cricket, be able to list all of the Marvel movies in chronological order, or sing the words to Auld Lang Syne, than to have a working knowledge of how the bankruptcy system works.  So it's not surprising that clients will frequently ask: "When will I know whether or not my creditors rejected my bankruptcy case?"  

The short answer is this: Creditors do not get to "reject" your bankruptcy case, and creditors cannot unilaterally deny bankruptcy relief to anyone.  

Bankruptcy laws are contained in the United States Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.  This is federal law, which means bankruptcy cases are administered in the federal court system.  Each federal judicial district has one or more appointed Bankruptcy Judge.  Other professionals, called Trustees, are appointed after cases are filed.  Trustees are charged with various duties, including a general duty to make sure the rules are followed and that creditors are treated fairly.  Creditors get notice of the bankruptcy case, and they are entitled to have a say as to whether or not they believe they are being treated fairly, according to the Bankruptcy Code.  Put another way: Creditors can participate, but they do not get to dominate.

So while trustees and creditors can raise issues in the case, only a judge gets to make the call as to whether a bankruptcy case is "accepted" or "rejected" and whether creditors are treated fairly."  "Accepted" and "rejected" are verbs that debtors often use to describe their concerns about what will happen to their case, but these are not terms of art.  Let's briefly look at what those concepts mean in a Chapter 7 or Chapter 13 case.

CHAPTER 7

Briefly put, Chapter 7 is a "liquidation," where a debtor seeks discharge of debts.  Not all debts can be discharged (legalese for "wiped out") in bankruptcy.  For example, domestic support claims, and many student loans and taxes will not be discharged if you file a bankruptcy case.  Those creditors do not need to take any action to "reject" your case.  The Bankruptcy Code already states that those types of debts will survive.  

Most other types of debts -- credit cards, personal loans, medical bills, "deficiency" balances on surrendered cards and foreclosed real property -- will automatically be discharged at the end of the case, unless those creditors affirmatively take action in the Bankruptcy Court.  Those creditors have a set deadline by which they must file an "adversary proceeding" (basically a stand-alone law suit that takes place within the confines of the bankruptcy case) to ask the Court to determine  that their debts should not be discharged.  Commencing an adversary proceeding is not something that is easy or inexpensive to do.   And any such objections to discharge must be based on very specific reasons.  For example, if a creditor could prove that a debt was obtained by committing fraud, that debt could be excepted from discharge.  Other examples include debts incurred by embezzlement or larceny, or a "willful and malicious" injury.  The average consumer debtor will not normally be involved in the sort of conduct that would trigger these types of objections.  

Remember that even if an adversary proceeding is filed, the Bankruptcy Judge is still in charge, and the result of this adversary proceeding is ultimately determined by the Court, after a trial if necessary.   Even if the creditor who filed the adversary proceeding prevails, only that creditor's debt will be excepted from discharge, but that does not extend to the entire case or the other debts addressed in the case.  

All of this assumes that the person in bankruptcy is acting honestly.  If the Bankruptcy Court finds, for example, that a debtor has not been truthful, has concealed information, or has not been cooperating with the Trustee, a Bankruptcy Judge can issue an order denying discharge of all debts!

CHAPTER 13

Chapter 13 is a "reorganization" that individuals with regular income can use to protect their assets.  For example, a Chapter 13 case can help catch up on missed car, house or tax payments.  This is done by proposing a "plan" that explains how each debt will be treated and provides notice of the terms of repayment of certain debts.  The goal is to have that plan approved, or "confirmed" by the Bankruptcy Court.  

Of course, the Bankruptcy Code preserves certain rights for creditors and requires plans to provide for certain standards of treatment.  Creditors have the right to "object" to the Chapter 13 plan if they believe the treatment they will receive does not comply with the Bankruptcy Code.  Such objections can often be resolved by agreement between the debtor and creditor.  But what happens if they can't agree?  You can probably see the pattern here:  The ultimate decision is made by the Bankruptcy Judge.  Placing the final decision-making process in a disinterested third party allows for a fair process even where the debtor or creditor would otherwise refuse to be reasonable.  

Chapter 13 Trustees receive and administer the funds a debtor is required to pay according to the plan.  Trustees have other duties, and they are charged with making sure a debtor's plan complies with the Bankruptcy Code.  Trustees can also object to plans where they see problems.  Trustee's objections are often akin to a list of issues that a debtor needs to correct in order for his or her plan to be confirmed.  And while a Trustee's objections are usually given great weight by the Court, it is ultimately the Court's decision to confirm or "deny" a plan.  

Trustees are also charged with monitoring the performance under a plan, and if payments are not timely made, or other rules are not followed, the Trustee can ask for the case to be dismissed for that reason.  However, no case can actually dismissed by the Trustee.  Only the Court has the power to decide to dismiss the case.  

***

If this glimpse into the labyrinth of bankruptcy procedure is a bit too much, just remember this: The Bankruptcy Code is designed to provide a balanced system of rules and procedures, to ensure a fair and orderly way to deal with debts.  That system would be broken if one or more creditors could arbitrarily decide to "reject" the case.  An experienced bankruptcy attorney can advise you on the best way to proceed and can assist you in dealing with any objections that a creditor might raise.  

The 7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit my website at narmorelawoffice.com for more information.  Narmore Law Office LLC is a debt relief agency and helps people file for relief under the United States Bankruptcy Code.