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An adversary proceeding is separate from the bankruptcy case that is taking place and it is important to understand this distinction. Put simply, an adversary proceeding is a separate lawsuit that arises during the bankruptcy case when a complaint is filed. An adversary proceeding is heard in front of a judge and is thus a judicial mechanism used to obtain relief of some sort. Any party to a bankruptcy case – the debtor, creditor or trustee – can file this complaint.

Not every bankruptcy case includes an adversary proceeding. If your bankruptcy case does end up including an adversary proceeding, the proceeding will have its own case number. It is even possible to have a different lawyer for the adversary proceeding.

An adversary proceeding is separate from the bankruptcy case that is taking place and it is important to understand this distinction.

Adversary Proceeding: Procedure

In order to jumpstart an adversary proceeding, a party to the bankruptcy case – debtor, creditor, trustee, etc. – must file a complaint with the bankruptcy court. A complaint is a document that states the facts and supporting law that the suing party – named the “plaintiff” – is using in his or her argument against the party being sued – named the “defendant.”

After the complaint is filed, the court issues a “summons.” A summons is an official order to appear in court, which the plaintiff must deliver to the defendant. The plaintiff must also deliver a copy of the complaint to the defendant.

The defendant must submit an “answer” to the summons within a specific time frame. This answer directly addresses the claims made in the complaint.

Why would a debtor file an adversary proceeding?

If a debtor feels that a creditor violated the Bankruptcy Code or an order by the court in their actions, they can file an adversary proceeding against them to collect damages.

Why would a creditor file an adversary proceeding?

The most common reason that a creditor involved in a bankruptcy case files an adversary proceeding is that the creditor doesn’t think that the debt owed to them should be discharged via bankruptcy. There are various exceptions to debt being discharged, and the creditor may argue one or more of them.

Although it is pretty rare, a creditor can bring an adversary proceeding claiming that the debtor filed bankruptcy in bad faith. It is rare for a bankruptcy case to make it so far without that kind of dishonesty being uncovered, though.

Why would a trustee file an adversary proceeding?

A trustee who is overseeing a bankruptcy case is also able to initiate an adversary proceeding. There are two types of trustees involved in a bankruptcy case. First, there is a bankruptcy trustee who is appointed to oversee your case once you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. The second type of trustee is referred to as the “U.S. Trustee.” The U.S. Trustee’s role is to supervise the bankruptcy trustee. Next week I will post about the U.S. Trustee’s more specific duties, so stay tuned.

Both the bankruptcy trustee and the U.S. Trustee can, and do, bring adversary proceedings during bankruptcy cases, although they do so for different reasons. If paperwork was not filed in a timely manner or contained some sort of error, the bankruptcy trustee may file to dismiss the case. The bankruptcy trustee may also file an adversary proceeding to undo a transfer of money or property that the debtor transferred to a creditor.

On the other hand, the U.S. Trustee has the power to file an adversary proceeding to have the case dismissed. This is done if the U.S. Trustee thinks that the debtor filed the bankruptcy petition in order to abuse the system. The U.S. Trustee can also file an adversary proceeding to change the case from a Chapter 7 bankruptcy to a Chapter 13 bankruptcy. The U.S. Trustee may have reason to believe that the debtor filed under Chapter 7 in bad faith.

For more information on adversary proceedings, contact us!