An adversary proceeding is essentially a lawsuit filed within a bankruptcy case. Adversary proceedings can be filed by creditors, the bankruptcy trustee, or the debtor. Usually, the person bringing the adversary proceeding typically is seeking to achieve a particular purpose such as having a debt declared nondischargeable, recovering fraudulently transferred property, or seeking redress for bankruptcy law violations. Read on to learn more about what happens if an adversary proceeding is filed in your bankruptcy.
Reasons for filing an adversary proceeding differ based on who is bringing the action. Below, we discuss the most common reasons a creditor, a bankruptcy trustee, or a debtor may want to file an adversary proceeding.
When a creditor files an adversary proceeding, it is usually to avoid its debt being discharged in the bankruptcy. A debt may be declared nondischargeable in bankruptcy if certain conditions are met. The most common examples are debts obtained by fraud or incurred shortly before the bankruptcy was filed. In most cases, a creditor must file an adversary proceeding to object to your discharge. (To learn more, see Objection to Discharge in Bankruptcy.)
The trustee can also file an adversary proceeding to ask the court to deny your bankruptcy discharge. If you lied on your bankruptcy papers, hid assets, or otherwise tried to abuse the bankruptcy system, the trustee can argue that you should not be entitled to the benefit of a discharge. In addition, the trustee can file an adversary proceeding to recover preferential payments and fraudulent transfers.
The debtor is also allowed to file an adversary proceeding in his or her bankruptcy. The most common reason debtors file adversary proceedings is to seek redress against their creditors for violating the automatic stay. Also, in certain jurisdictions, debtors may be required to file an adversary proceeding if they want to eliminate their second mortgage (or other junior lien) from their house through lien stripping.
To file an adversary proceeding, a formal complaint must be filed with the court and served on the defendant. The complaint will set forth all relevant facts and the relief requested. Depending on the rules in your jurisdiction, you will have a certain amount of time to respond to the complaint. Failure to respond will typically result in a default judgment being entered against you.
In order to defend an adversary proceeding, you must be familiar with the Federal Rules of Bankruptcy Procedure, local court rules, and substantive bankruptcy law. If a creditor is objecting to your discharge and the amount of debt in question is not very high, you may be able to negotiate with the creditor and settle outside of court.
But if the adversary proceeding involves a more serious matter, a trial is usually necessary. In that case, it may be a good idea to seek legal representation. If you are facing an adversary proceeding in your bankruptcy, talk to a knowledgeable bankruptcy attorney who regularly handles adversary proceedings to learn about your options.