Adversary proceedings are when you need to continue to fight it out in bankruptcy court with the results affecting your bankruptcy. This happens when you file bankruptcy while either you or a creditor might also need to file a lawsuit to have a bankruptcy judge determine the results. In this scenario, you and the creditor are adversaries.
Bankruptcy Adversary Proceedings: Chapter 7 and 13
Adversary proceedings are lawsuits relating to the bankruptcy case that file separately. Bankruptcy litigation involves these adversary proceedings, which are separate from the main bankruptcy case and require specialized legal knowledge. Common adversary proceedings heard by a bankruptcy judge in Chapter 7 and 13 include the following:
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You buy a Rolex watch a week before you file bankruptcy and the creditor wants you to pay for the watch. It appears that you knew you were filing bankruptcy when you bought the watch. (Contesting your discharge.)
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A lender or collector continues to attempt collections after the case files in contempt of the bankruptcy stay or discharge orders. After a judge administers the case, contempt of the stay is far more serious than a violation of the discharge order. Contempt of the stay also affects the judge and the trustee. Unfortunately, violating the discharge only harms the debtor. (Contempt of Court.)
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You need to determine whether a student loan or income tax debt is going to be dischargeable. Then, an adversary proceeding makes certain it is. With a student loan, you are getting a judge to determine that if you pay the debt, it is an undue hardship. With an income tax debt, you are seeking a determination that the tax return filing was on time with no fraud or effort to evade the tax. (Determination of dischargeability.)
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You need to strip the second mortgage, and the mortgage company or you want a full trial on that issue. (Determination of the status of the lien).
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You sell the 100,000 Mercedes to your mother just before filing. (Fraudulent and preferential transfers.)
While most issues in bankruptcy court are an accounting matter, some issues must be decided by more than a motion. There is a complaint, answer, discovery, and often a trial. In these circumstances, you might have to resort to an adversary proceeding.
⎆ What is an Adversary Proceeding?
An adversary proceeding is a lawsuit filed within the context of a bankruptcy case, governed by the Federal Rules of Bankruptcy Procedure and the Federal Rules of Civil Procedure. Unlike the main bankruptcy case, which deals with the overall financial situation of the debtor, an adversary proceeding is a separate lawsuit designed to resolve specific disputes that arise during the bankruptcy process. These disputes can involve the debtor and a creditor, or even multiple creditors.
Adversary proceedings can address a variety of issues, such as the validity of a claim, the amount owed, or the priority of claims among creditors. For instance, if there is a disagreement over whether a particular debt should be discharged, an adversary proceeding can be initiated to resolve this issue. This process ensures that all parties have a fair opportunity to present their case and that the bankruptcy court can make an informed decision based on the evidence and arguments presented.
⎆ How to file Chapter 7 and 13 adversary proceedings.
Every adversary proceeding is related to the main bankruptcy case. Someone files the complaint, and another party or parties defend the case with an answer. The court clerk assigns this case a different case number, but the main bankruptcy case number is also listed in the caption of anything filed in this adversary proceeding, as required by the bankruptcy code.
Each adversary case must pay a filing fee unless there is an exception such as the debtor determining the dischargeability of a debt. A summons must be issued, and the defendant must be served with the complaint and cover sheet. Some of the necessary parts of the adversary complaint include the following.
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The case has to have a caption that identifies the parties, the main bankruptcy case, and which bankruptcy court the case is in.
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The facts and allegations of the case need to be set forth.
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The reason for that bankruptcy court to have the decision and jurisdiction over the matter.
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What relief you want from the court.
Less than one in a hundred of our bankruptcy cases involve an adversary proceeding. The attorney should plan a case so adversary proceedings can be avoided. However, the attorney cannot avoid the behavior of a creditor who is determined to violate a stay. In cases like that he will have to sue the bank.
⎆ Initiating an Adversary Proceeding
To initiate an adversary proceeding, a complaint must be filed with the bankruptcy court. This complaint outlines the grievances and the specific issues that need to be resolved. Once the complaint is filed, it must be served on the defendant along with a summons, which formally notifies the defendant of the lawsuit and the need to respond.
The defendant has a set number of days to respond to the complaint. If the defendant fails to respond within this timeframe, the bankruptcy court may issue a default judgment in favor of the plaintiff. This means that the court may decide the case based on the plaintiff’s allegations without hearing the defendant’s side.
The rules for initiating an adversary proceeding are detailed in the Federal Rules of Bankruptcy Procedure. These rules require that the complaint be comprehensive, including a list of grievances and supporting evidence. While it is rare, witnesses can be called to testify during an adversary hearing to provide additional evidence and support the claims made in the complaint. Given the complexity of these proceedings, it is often advisable to seek the assistance of a bankruptcy attorney to navigate the process effectively.
⎆ The three common types of adversary proceedings.
A bankruptcy proceeding is the overarching legal process involving the management of debts and disputes within bankruptcy law.
These three types of adversary proceedings are most common:
1. Creditor proceedings.
To try to stop his debt from being discharged, a creditor must object to the discharge by filing an adversary proceeding within 60 days after the first date set for the 341 hearing, particularly if the debt incurred is questionable. See FRBP 4007. A creditor or trustee can ask for an extension of the deadline. Often if the trustee or creditor asks for an extension when they’re not sure whether the case can file. To this end, they may do a 2004 deposition and ask questions to determine if filing the case is proper.
The Creditor has to be cautious in filing an adversary proceeding to determine the dischargeability of consumer debt. That’s because the failure to win means the creditor has to pay actual damages to the debtor plus often the debtor’s attorney fees and possibly punitive damages. The reasons for not discharging a debt are set out in 11 USC 523.
Fraud is the most common reason, but that’s hard to prove. However, one of these sections does imply fraud if the charges are made just before filing. Creditors rarely object to discharge and the penalty under this section only means you have to pay the debt.
If a creditor fails to object to a discharge of his debt, his debt is automatically dischargeable. However, debts that are not normally dischargeable under 523, do not have to file objections to discharge. Those debts include child support, alimony, student loans, and debts to the federal government. Other creditors such as a credit card, medical debt, or victim of a traffic accident are discharged.
2. Bankruptcy trustee adversary proceedings.
The US Trustee, often referred to as the bankruptcy trustee, can file an adversary proceeding but their most common duty is to ensure petitions are accurate or to make sure persons with high incomes repay creditors. In fact, the US Trustee has sued creditors for unfair tactics.
The Chapter 7 bankruptcy trustee sues in an adversary proceeding most often to recover money from fraudulent or preferential transfers. The Chapter 13 Trustee can also file motions or adversary proceedings to ensure the bankruptcy process is not abused.
3. Debtor adversary proceedings and debtor’s discharge.
Most importantly, the debtor can file an adversary proceeding against a creditor or trustee to ensure the debtor’s discharge of a debt is properly handled. The debtor does not have to pay a filing fee to determine the dischargeability of any debt. About 500 cases a year are filed by debtors to determine the dischargeability of student loans and about 250 or half of the people win. I estimate less than that file against the IRS to determine if an income tax debt is dischargeable.
Resources for Bankruptcy Court
Louisville Kentucky Bankruptcy Forms
Other Related Information
Fraud Stay Discharge Adversary Complaints
Student Loans in Bankruptcy – Hardship Discharge
Student Loans in Chapter 13 Bankruptcy
Constructive fraud can also be a significant factor in adversary proceedings, particularly when determining the dischargeability of debts.
If you are facing bankruptcy, don’t delay. Contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905
