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Bank loan successfully discharged under Chapter 7 bankruptcy proceeding

January 28, 2014

A person under financial stress may consider the option of filing for Chapter 7 bankruptcy protection. Under Chapter 7, a person may generally remove most of his or her debts and make a fresh financial start. The recent United States District Court case of Rockstone Capital, LLC v. Ashenberg provides an example where a debtor was successfully able to discharge a loan debt, despite objections from the creditor. A line of credit extended The debtor was the founder, president and principal shareholder of a business which sought a credit line of $75,000 in 1998 from a bank. Approximately two years later, the debtor applied for and received an increased credit line of $250,000 . Under the credit line contract, the debtor agreed to use the bank as his principal depository. In the following years, the debtor's business declined; in 2004, he transferred more than $500,000 into another bank. The debtor made this decision based on business considerations, including the new bank providing a checking account with a more favorable interest rate. In 2005, the creditor-bank sent the debtor a default letter demanding payment of the principal balance owed and later filed a complaint to enforce the debt. The debtor filed for Chapter 7 bankruptcy relief. The creditor-bank argued that its debt should be non-dischargeable in the bankruptcy proceeding, alleging that the debtor had intended to defraud the bank by fraudulently transferring his assets. Did the debtor intend to injure the bank's interest? In reviewing the case on appeal, the United States District Court first noted that the trial judge had been in a position to assess the credibility of the debtor. Under the applicable provision of the federal bankruptcy law, a discharge of the debt would not be available if the debtor intended a willful and malicious injury to the creditor. A finding of nondischarge in this circumstance would require a deliberate injury, not merely an intentional act, such as transferring the funds for a business purpose, that then led to an injury. The funds that the debtor transferred were being used to operate and maintain his business. In addition, even though the debtor had received the demand letter requesting payment of the principal balance owed, the debtor was under the belief that he was only required to continue paying interest on the loan after the demand was made. The trial judge had found that the bank had not met the evidentiary requirement necessary to prove that the debtor had intended an injury, and the United States District Court agreed, affirming the discharge of the debt in the bankruptcy proceeding. A fresh financial start It is, indeed, possible to receive a fresh financial start by pursuing a bankruptcy action. Several different bankruptcy options exist, and which one best suits an individual's needs depends on that individual's circumstances. If you are contemplating declaring bankruptcy, seek the counsel of an experienced bankruptcy attorney who can advise you on the best possible approach for your situation.

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Source: Legal Monitor Worldwide

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