Bankruptcy fraud claims can be settled like virtually any other legal claim.
Trying to get off the hot seat now is former Michigan State, among other stops, head
football coach John L. Smith.
Sorry, Spartan fans, I can’t resist.
Mr. Smith took over last season at Arkansas after their married coach fell off his motorcycle while giving a young lady a ride. Someone, it turned out, he had hired. Someone who had no discernible qualifications for the position, but appeared eminently qualified to take on motorcycle trips.
Anyway, no sooner did John L. ride to the rescue than he had to file personal bankruptcy over some Kentucky land deals that went sour.
DISCHARGING DEBTS IN BANKRUPTCY
Now, a bankruptcy discharge is not automatic. There are specific exceptions to discharge, which are different for Chapter 7 or Chapter 13 or Chapter 11, such as child support, criminal fines, damages caused by drunk driving accidents, and so on.
These are mostly under 11 USC 523. But there are provisions under 11 USC 727 that deny a discharge as to ALL debts. Your bankruptcy case proceeds, so a trustee can administer any assets, but you still owe all your debts.
A creditor, or the trustee, can file a complaint, a separate lawsuit, in your bankruptcy case, under one of the grounds listed in the statute for denial of your bankruptcy discharge. Some of the grounds are lying at your bankruptcy hearing, or on the bankruptcy schedules you filed with the court, concealing assets, stuff like that.
SETTLING 727 DISCHARGE COMPLAINTS
A creditor filing a 523 complaint that its debt should be excepted from discharge can make a deal with that creditor, and none of the other creditors have a say.
727 complaints to deny a discharge entirely are different. A proposed settlement must be noticed out to all creditors, as in John L. Smith’s bankruptcy case.
The reason is, 727 issues are an affront to the system, a wrong against all the creditors, not just one.
So, the thinking goes, why should the aggressive creditor, who found the concealed assets or uncovered the fraud, be able to extort money from the debtor to settle. In effect, this amounts to selling the debtor his discharge.
In my experience, the other creditors do not do anything anyway. But they should be given the opportunity, that the debtor may be a bad guy, getting off the hook by paying off one of the creditors.