How Common Are Adversary Proceedings in Bankruptcy?

The purpose of a bankruptcy proceeding is to determine the extent to which the person seeking bankruptcy can cover their expenses. Expenses that the petitioner cannot pay either get reorganized up into a repayment plan in a Chapter 13 bankruptcy or discharged in a Chapter 7 bankruptcy. Traditionally, the bankruptcy process is non-adversarial in that the person filing for bankruptcy presents information to the bankruptcy trustee, and they determine the appropriate course of action. However, in some bankruptcy cases, there are disputed issues that result in bankruptcy adversary proceedings. This can complicate and delay a bankruptcy case.

Many bankruptcy cases proceed from beginning to end without an adversary proceeding. However, adversary proceedings are far from rare. While some adversary proceedings stem from the filer’s conduct, that is not always the case, so it’s almost impossible to determine at the outset whether an adversary proceeding is on the horizon. However, once it becomes clear that an adversary bankruptcy proceeding is imminent, it is important to retain the assistance of a New Jersey bankruptcy lawyer who is knowledgeable in that particular area.

What Is an Adversary Proceeding in Bankruptcy Court?

At this point, you may wonder, What is an adversary proceeding? An adversary proceeding is a separate lawsuit that is filed in relation to a bankruptcy case. Adversary proceedings become necessary when an issue comes up during a bankruptcy that the bankruptcy court needs to resolve. Any party of bankruptcy can file an adversary proceeding, including debtors, creditors, and trustees. Once a party files an adversary proceeding, the court will assign the case a separate case number. And once a party initiates an adversary proceeding, the bankruptcy case cannot conclude until the court resolves the contested matters.

Federal Rule of Bankruptcy Procedure Rule 7001 lists some actions that must proceed as adversary proceedings. However, the following situations are the most likely to result in an adversary proceeding.

Disputes Surrounding the Dischargeability of Certain Debt

Many types of debt are dischargeable through a Chapter 7 bankruptcy. In fact, this is one of the main benefits of filing for bankruptcy. However, certain debts are not dischargeable. For example, student loans, state and local taxes, child support, and alimony are all non-dischargeable debts. However, there are also other debts that cannot be discharged due to the debtor’s malfeasance. If a creditor or the bankruptcy trustee believes that certain debts of the bankruptcy petitioner should not be discharged, they may file for an adversary proceeding.

General Objections to the Discharge of All Debt

In certain situations, when creditors or the bankruptcy trustee believes that the debtor wrongfully transferred property or hid assets, they may object to the discharge of any debt. Creditors and bankruptcy trustees can go back as far as two years if there is evidence of a wrongful transfer.  

Fraudulent Transfers

Bankruptcy trustees and creditors are on the watch for any fraudulent transfers that may adversely affect their interests. For example, if you plan on filing for bankruptcy, you cannot transfer your entire bank account balance to your sister for safekeeping. If a bankruptcy trustee or a creditor believes this to be the case, they may file for an adversary proceeding in an attempt to “clawback” the assets.

A Violation of the Automatic Stay

Once someone files for bankruptcy, the court will impose an automatic stay. This prevents all creditors from making efforts to collect what they are owed during the case’s pendency. If a creditor violates the terms of an automatic stay, a bankruptcy petitioner may file an adversary proceeding. If successful, the bankruptcy petitioner can recover actual damages, including costs and attorney’s fees.

Lien Stripping

Bankruptcy petitioners may file an adversary proceeding to “strip” certain debts of their secured status. This is referred to as lien stripping. Lien stripping is when a debtor in a Chapter 13 bankruptcy case seeks to “strip” a junior debt holder’s interest. If successful, the junior debt holder’s interest becomes an unsecured claim, which will eventually get combined with all other unsecured debt.

Preferential Payments and Compelling a Party to Turn Over Assets to the Trustee

If a bankruptcy trustee believes that a third party is holding assets of the debtor, the trustee can file an adversary proceeding naming the third party as a defendant. Similarly, a bankruptcy trustee may pursue an adversary proceeding to recoup money the debtor paid to a creditor shortly before filing for bankruptcy.

Unrelated Legal Matters Arising During the Bankruptcy Process

After someone files for bankruptcy, other legal issues that are unrelated to the bankruptcy may require the bankruptcy court’s attention. Any party who intends to bring a proceeding that would normally be filed in state court will typically be filed as an adversary proceeding if there is an ongoing bankruptcy pending. For example, a bankruptcy court may resolve contract and business disputes through this process.

Bankruptcy law is always complex—however, this is especially the case when adversary proceedings in bankruptcy arise. Anyone who receives notice that another party filed an adversary proceeding against them or believes they need to file an adversary proceeding to protect their own interest should consult with an experienced New Jersey bankruptcy attorney.

Contact the Law Offices of Brenner Spiller & Archer., to Learn More

If you are in the process of filing for bankruptcy and the words “adversary proceeding” come up, it’s best to reach out to a knowledgeable attorney. Even if you already have a bankruptcy lawyer working on your case, the scope of an adversary proceeding may exceed the scope of that attorney’s experience and knowledge. This is where the Law Offices of Brenner Spiller & Archer., can help. Our New Jersey bankruptcy attorneys have over 40 years of experience helping clients navigate the complexities of the bankruptcy process. We regularly handle Chapter 7 and Chapter 13 bankruptcies and a wide range of adversary proceedings for our clients. To learn more and to schedule a free consultation with an attorney at Law Offices of Brenner Spiller & Archer., give us a call at 856-963-5000. You can also connect with us through our online contact form.