Although bankruptcy can be complicated enough, there are different types of lawsuits that can “arise in,” “arise under,” or “relate to,” a bankruptcy case. For example, a chapter 7 trustee or debtor in possession may initiate a “fraudulent transfer” or “preference” action against a third party who did not file for bankruptcy. In these cases, a chapter 7 trustee or debtor in possession is seeking to collect money “owed to the bankruptcy estate.” A fraudulent transfer may be asserted under either federal bankruptcy law or state law. Although it sounds to the contrary, a “fraudulent transfer” does not require actual fraud. The essence of this type of lawsuit is that the third party received valuable property from the debtor for “less than reasonably equivalent value” either 90 days or one year prior to the filing of bankruptcy. In a similar vein, a preference action, pursuant to 11 U.S.C. § 547, is essentially an allegation that a creditor received a payment or transfer of property prior to the bankruptcy that unfairly favored that third party over other creditors.
Another fairly common lawsuit is an action to determine that a debt is non-dischargeable under 11 U.S.C. 523. This form of action typically seeks to prove that a debtor incurred a loan by “false pretenses, a false representation, or actual fraud.” If a creditor is able to prove that the debtor committed such acts, the debt between that creditor and the debtor will remain non-dischargeable. However, all other debts will be allowed to be discharged. For these types of lawsuits, it is common for a credit card company or a loan resulting from a business to initiate this type of lawsuit.
Finally, the last type of lawsuit that will be discussed is an action under 11 U.S.C. § 727. If a creditor or trustee brings this action, the debtor is being threatened with a complete bar to discharge; this means that a debtor will not be allowed to discharge any of his debt. Although the grounds for this lawsuit are primarily limited to fraudulent acts, failure to obey court orders, or intending to hinder or delay creditors, if a debtor is faced with this type of lawsuit, serious consequences may ensue. The entire list of reasons to bar a debtor from discharging his debt are listed in § 727(2)-(12).
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If you have been sued or would like to protect your rights in a bankruptcy case, speak to a bankruptcy attorney in New Jersey today by filling out our online form or calling us at (908) 656-4704. We will schedule a Free Consultation so that you get the answers you need to all your financial questions.