Adversary Proceedings in Bankruptcy

Disputes in bankruptcy court requiring the judge’s resolution may be done so through an adversary proceeding. 

What’s an Adversary Proceeding?

It’s simply a lawsuit that is part of a bankruptcy case. Like it sounds, it’s a way for adversaries to fight it out in bankruptcy court.

The main bankruptcy case involves a debtor and the creditors of that debtor. The bankruptcy court clerk assigns each case a case number.

In an adversary proceeding, as in most lawsuits, one or more plaintiffs file a complaint against one or more defendants. The debtor in the bankruptcy case can be either a plaintiff or a defendant in the adversary proceeding. The debtor is usually one or the other, but not necessarily. Disputes can arise in a bankruptcy case that don’t directly involve the debtor as a party.

An adversary proceeding gets its own case number distinct from the bankruptcy case number.

Most consumer bankruptcy cases don’t involve an adversary proceeding. That’s usually good because most people want a straightforward, uncontentious case. But adversary proceedings are still quite common, able to arise in just about any case. Sometimes an adversary proceeding can be the only way to get something you want. Or it’s necessary to avoid something happening that you don’t want to happen. So it’s worth understanding them.

The Parties Who Can File an Adversary Proceeding  

There are three sets of people who can file an adversary proceeding:

• Your Creditors
• The Trustee (the Chapter 7 or 13 Trustee, or U.S. Trustee)
• You, the Debtor

There’s a technical list of ten different types of adversary proceedings in the Federal Rules of Bankruptcy Procedure Rule (FRBR) 7001. But it’s more practical to look at what particular kind of relief each of the above 3 sets of people would be asking for in an adversary proceeding.

Today we start with possible adversary proceedings by creditors against you. 

A Creditor Challenging the Discharge of a Debt

When a creditor files an adversary proceeding, it is usually about whether its debt should be discharged—legally written off. (See FRBP 7001(6).) The issue whether that one particular debt should be discharged or not.

Most debts can be discharged in bankruptcy, but there are exceptions. (See Section 523(a) of the U.S. Bankruptcy Code.) The exceptions include debts created through a debtor’s fraud or misrepresentation, or through “willful and malicious injury” to person or property.

With these kinds of debts the bankruptcy still discharges the debt unless the creditor files a adversary proceeding. So if the creditor does nothing, the debt is discharged, along with the rest of your dischargeable debts.

The Creditor’s Deadline

With these debts that the creditor must challenge to avoid discharge, it has a strict deadline to do so. The creditor must file the adversary proceeding “no later than 60 days after the first date set for the [meeting of creditors].” (See FRBP 4007(c).) The meeting of creditors is usually about a month after you file your bankruptcy case. So creditors must challenge the discharge of a debt within about 3 months after the case filing.

This deadline is very strict. If a creditor gets notice of the bankruptcy case but doesn’t object by this quick deadline, it’s out of luck. The debt is discharged. That’s the case even if the debt was actually incurred through misrepresentation or “willful and malicious injury.”

Extension of the Deadline

One exception is if the creditor files a motion asking for an extension of this 60-day deadline. But it has to do so “before the time has expired.” (FRBP 4007(c).)

Why would a creditor file such an extension motion? Mostly this would happen if it thinks it may have grounds to challenge the discharge of its debt but needs more time to determine whether or not it does. It wants to avoid paying the filing fee and attorney fees of litigating an adversary proceeding until making sure. It can get expensive for a creditor to go through an adversary proceeding. If it does not convince the bankruptcy court that the debt should not be discharged, the creditor would have wasted all of its additional costs.

Your Attorney Fees If the Challenged Debt is Still Discharged

There’s another reason a consumer creditor may hesitate to challenge the discharge of its debt. If it loses by not showing valid grounds for the debt not to be discharged, it may also have to pay your bankruptcy lawyer’s fees in defending the adversary proceeding. This may happen if the bankruptcy judge determines that the creditor’s position “was not substantially justified.”

Debts NOT Requiring Adversary Proceeding

Everything stated above only applies to certain kinds of debts. There are other kinds of debts that don’t require the creditor to file an adversary proceeding to avoid discharging the debt. Criminal fines and restitution, taxes that fit certain criteria, and child and spousal support are examples of debts that survive bankruptcy without any action by the creditor.

Conclusion

Again, most consumer bankruptcy cases do NOT have any adversary proceedings. In particular, most do not include any creditor challenges to the discharge of a debt. If you are concerned about whether any of your debts will continue after bankruptcy, discuss it with your lawyer.