Our tenacious lawyers provide solid arguments to disprove the dischargeability of a debtor with a questionable financial status. Similarly, Phillips Law Office protects the rights of debtors enduring unjust harassment from their creditors.
What Is an Adversary Proceeding in
In a typical bankruptcy case, the court appoints a trustee to administer the assets of a debtor who can’t pay his or her debts. According to the bankruptcy code, the trustee oversees the debtor’s assets and determines which bills the debtor needs to pay and how they should be paying them. In Chapter 7 bankruptcy, this “how” involves selling off assets. In Chapter 13 bankruptcy, it involves reorganizing assets so that the debtor can pay the debts back over time.
In some cases, the debtor, the appointed trustee, or a creditor might challenge some aspect of the case. For example, they might claim that a payment was improper or that another party committed fraud. Debtors who have filed for bankruptcy gain certain rights, including an automatic stay protecting them from creditors while they work out a way to pay their debts over time.
Creditors also have rights with respect to the debtor and with each other. If any party to the bankruptcy proceeding feels that these rights have been violated, they can file a complaint with the office of the clerk for the bankruptcy court. Under certain conditions, these complaints initiate a particular kind of lawsuit called an adversary proceeding.
The Purpose of Adversary Proceedings
In a bankruptcy case, a conflict exists between creditors, to whom money is due, and debtors, who owe that money. A bankruptcy case is when the debtor asks the government to discharge or eliminate some or all of that debt.
The bankruptcy code reconciles the creditors’ needs with the opportunity of debtors to get a fresh start and rebuild their lives. The bankruptcy code also determines which debts are dischargeable and which debts are not dischargeable—and then sets out procedures for how creditors will recover their money. Bankruptcy proceedings preserve the social and economic order by resolving this conflict lawfully.
Because bankruptcy is important to promoting social and economic order, a mechanism must exist to ensure that all parties are acting in good faith and that the process respects the rights of all parties. By separating a dispute from the bankruptcy case, adversarial proceedings allow all parties, and the presiding judge, to step back from the bankruptcy claim and focus on the fairness of the process itself.
Adversary Proceedings, Contested Matters, and Rule 7001
In many cases where a dispute exists, the court can often resolve the issue quickly, sometimes without a civil trial. The legal name for these disputes is contested matters. However, in some cases, creditors and debtors may have conflicts that need separate handling distinct from the bankruptcy case itself. These are adversary proceedings.
An adversary proceeding resembles other lawsuits except that it involves specific matters that relate to the bankruptcy case. The trustee, a creditor, or the debtor can file a complaint with the court. The plaintiff and defendant in adversary proceedings each present evidence and argue for their own interests. The presiding judge will need to reconcile the claims of the debtor, any listed creditors, the trustee, and other parties to the dispute.
The Federal Rules of Bankruptcy Procedure (Rule 7001) outlines specific types of complaints considered adversary proceedings. Some examples of complaints that fall within Rule 7001 are as follows:
- Situations where a debtor or creditor is trying to recover money or property. For example, a debtor might hide assets by putting them in someone else’s name, which is fraudulent conveyance. Creditors might petition the court to reclaim that money. Alternatively, a creditor might have collected on an officially dischargeable debt (which, according to the bankruptcy code, did not need payment). The debtor could try to recover these assets in an adversary proceeding.
- Complaints regarding liens, which are claims made against property, such as a house, in order to secure payment of a debt.
- Complaints regarding the sale of jointly-owned property. For example, the trustee might compel a non-bankrupt co-owner of a property to sell so that part of the proceeds could pay off the debt.
- Conflicts over whether a debt is dischargeable. The bankruptcy code has rules about which debts are dischargeable and which are not, but these rules can be complex. For example, the United States Bankruptcy Code does not consider student loan debt to be dischargeable in bankruptcy.
- Conflicts over the order in which debts get paid. Prioritizing one debt over another is preference. The timing and nature of the debt are factors in determining which debts take precedence over others.
- Complaints about creditors trying to collect on debts in violation of a stay order. The debtor could seek an injunction to recover any assets the creditor has taken, and the creditor could be subject to additional penalties.
After a party files a complaint, the other party can respond, or the judge can issue a default ruling. The details of the bankruptcy code and the details of the case might be complicated. Many restrictions and limitations exist regarding each party’s rights in an adversary proceeding, as well as case law that sets precedent. As with any lawsuit, a lengthy trial may ensue before the judge renders a decision. The process could delay the payment of debts or any relief or injunction that either party has been seeking.
An adversary proceeding adds complexity to the case. Still, it may be the best legal recourse in situations when the debtor or creditor is not abiding by the court’s decisions or when either party objects to elements of the court proceedings. Because adversary proceedings settle disputes related to the original bankruptcy case, the ruling in an adversary proceeding can have financial consequences for both debtors and creditors.
Should I Hire an Attorney?
Because of the complexity of adversary proceedings, anyone seeking to file a complaint or anyone who has had a complaint filed against them should consult an attorney. The rules for The United States Bankruptcy Court for the District of Maryland are different than in other states, so be sure to hire an attorney who has local knowledge and experience handling bankruptcy cases in the state.
At The Phillips Law Offices, LLC, in Greenbelt, MD, our team has over two decades of bankruptcy litigation experience. Please call us today at 301-494-4250 for a free consultation.