Creditor Challenges Business DebtsWhy Creditor Challenges Occur After You Close Your Business

  1. In the case of a business closing due to bankruptcy, the sum of debt owed is usually more substantial than when an average person files bankruptcy. Therefore, challenging is much more attractive to the creditor.
  2. Usually, with business, the debtor-creditor relationships are more intimate. When the company fails, there is a lot more at stake. Creditors are generally personally hurt. Imagine former business partners who might be accusing each other that he or she ruined the business. Another example would be between the business owner and a primary investor who believes that the business owner mismanaged the invested money. Our last case is the relationship between the contract buyer of a business and the seller. The buyer might feel like the seller exaggerated the profitability of the company to be sold. Under these circumstances, these creditors are more likely to want to dispute the discharge of their debts.
  3. When a business is failing the business owner may make questionable decisions to keep their business going. This exposes the business owners to objections about fraud and so on.

Usually, in these cases, the creditor is often aware of the business owner’s questionable decisions, and therefore they have the legal grounds necessary to object to the discharge of their debts.

Objections to Discharge Still Few and Far Between

While we mentioned the reasons above why a creditor might try to attack a former business owner, it still does not occur as frequently as you might think. You might ask why? Here are some reasons:

  1. The legal grounds are quite narrow for the creditor to challenge the business owner. To challenge the discharge of debt, a creditor must prove that the debtor engaged in behavior that justifies challenging the discharge of indebtedness. This includes (but is not limited to): fraud in incurring debt, embezzlement, theft, fraud as a fiduciary, or intentional and malicious injury to property. This behavior is not natural to prove. Creditors do not tend to challenge unless they have definite proof.
  2. In a bankruptcy case, the debtor files specific papers that contain extensive information about his or her finances under oath. The business owner is then questioned extensively by creditors about the information on the documents. Questions may include anything else they deem relevant to the discharge of his or her debts. Information on these documents or from questioning may reveal that the debtor has no assets worth pursuing.  A shrewd and rational creditor will usually resolve not to throw good money away and continue an objection.

In conclusion, there are two possible outcomes in a closed-business bankruptcy. Challenges to discharge debt are more likely to occur in the case of close relationships between creditor and debtor. However, these challenges are usually still rare because of the narrow legal grounds it takes to object. An astute bankruptcy attorney will advise you on this, prepare your bankruptcy paperwork to discourage these types of objections and will help derail any complaints if any are brought up.