What Is an Adversary Proceeding in Bankruptcy?

Most bankruptcies involve a lot of paperwork. It starts with filing a claim stating that you cannot pay your debts. Creditors will then review whether they agree or disagree before the judge makes a final decision whether to dismiss or discharge your debts.

In some cases, creditors have questions about the dischargeability of a debt. If there are any issues during the bankruptcy proceedings, creditors or the debtor can file an adversary proceeding.

What Is an Adversary Proceeding?

An adversary proceeding is a lawsuit filed during a bankruptcy case. It resolves disputes between debtors and creditors, or creditors and the bankruptcy trustee. The U.S. Bankruptcy Code permits creditors to challenge many debts someone might claim in a bankruptcy. Common types of adversary proceedings can include:

• Objection to Discharge: The creditor or bankruptcy trustee claims the judge should not grant the debtor’s discharge because of fraud, misconduct, or concealed assets
• Dischargeability of specific debts: This applies to a specific debt acquired by fraud, malicious injury, or other unlawful means, which cannot be discharged
• Fraudulent transfer: Trustees can recover assets transferred before bankruptcy to conceal them from the bankruptcy court (a debtor can also file to have property restored by this method)
• Lein Issues: Determining the validity of a property lien, or having the lien released

This is not an exhaustive list.

How an Adversary Proceeding Works

Rule 7001 of the Federal Rules of Bankruptcy Procedure Part VII governs adversary proceedings. The Rule defines which matters require a separate trial and which the bankruptcy judge can handle.

If the judge can make a decision after a hearing without evidence, the issue is a contested matter. Contested matters can include requests to lift automatic stays or objections to a creditor’s proof of claim. Matters that would have required legal action before the bankruptcy, such as injunctive relief or property recovery, will require legal action during the bankruptcy.

Steps in an Adversary Proceeding

Adversary proceedings are filed as a separate lawsuit within the bankruptcy proceeding. They require parties to give notice, file motions, and conduct discovery. The trial rules follow the Federal Rules of Civil Procedure for court cases.

Parties may need a trial lawyer for this process. The verdict can be appealed. The process is not quick, often taking weeks or months. As with other trials, alternative dispute resolution procedures, such as mediation, are possible.

Outcomes of Adversary Proceedings

The outcome of an adversary proceeding depends on its purpose. The result can have a profound impact on the main bankruptcy case. Some outcomes may include:

• Denial of discharge: If the adversary proceeding finds that the debtor engaged in fraud or concealed assets, the judge can dismiss the bankruptcy entirely
• Denial of certain debts: The judge may declare specific debts non-dischargeable, so the debtor must still pay them
• Recovery of illegal transfers: Trustees may recover property improperly transferred to friends or family before filing (“fraudulent transfers”) for liquidation
• Default judgment: Adversarial proceedings have the same deadlines as other trials, and missing one can result in a default judgment
• Settlement or dismissal: The parties can settle before the trial, or file a motion to dismiss, as in any case

Other outcomes are possible as well. Each bankruptcy is unique and has different details.

Who Can Initiate an Adversary Proceeding?

Although creditors usually initiate adversary proceedings, the debtor may also file. Debtor filings often seek to have otherwise non-dischargeable debts erased, such as student loans or liens on property.

Debtors must still go through the same legal process as creditors, including filing a notice and complaint and serving the creditor. Debtors generally do not have to pay the filing fee when they file an adversary proceeding.

Bankruptcy law is complex, and trial law has its own set of restrictions. Unless you have a firm grasp on both, you want to consider hiring an experienced bankruptcy lawyer to handle your adversary proceeding. They can handle the federal bankruptcy rules, state rules, and local court rules you’re likely to encounter.

Get Specialized Legal Advice From a Bankruptcy Attorney

You may be able to do your own bankruptcy filing. If you have any questions or feel like you’re getting in over your head, there’s no shame in seeking legal advice for any Chapter 7 or Chapter 13 bankruptcy. When it comes to an adversary proceeding, it’s a good idea to speak with a bankruptcy attorney. They’ll examine your situation, explain your options, and guide you through the process.