What is an adversary proceeding
The creditor—The most common reason for a creditor to file an adversary proceeding is to avoid or prevent a specific debt from being discharged in bankruptcy. Usually, this type of proceeding is initiated when the debt was incurred fraudulently or shortly before the bankruptcy was filed. The most common example of such a proceeding concerns credit card debt accrued in the period just before filing for bankruptcy. An adversary proceeding that impacts the dischargeability of a debt can be serious for the debtor. If it is upheld, the debtor cannot ever discharge that particular debt in bankruptcy; the debt will remain even after the bankruptcy process is complete.
The trustee—Trustees, particularly the U.S. Trustee, usually file adversary proceedings where fraudulent behavior is concerned. These suits commonly fall under the category of “objection to discharge.” In other words, the aim of the adversary proceeding is to deny a debtor’s entire discharge or to revoke a discharge that may already have been granted.
A denial of discharge proceeding is based on such factors as the debtor destroying or withholding records; concealing or moving property of the estate with fraudulent intent within the year prior to filing a bankruptcy petition; making a false oath or presenting a false claim; or failing to explain a deficiency or a loss in their assets. Factors that may contribute to a discharge being revoked include false statements or withheld information during a bankruptcy audit; a discharge that was obtained fraudulently by the debtor and in which the plaintiff (in this case, the trustee) was not aware of the fraud until after the bankruptcy; or the acquisition of property by the debtor that would normally be property of the estate, such as a tax refund or inheritance, but which the debtor kept for personal use.
The debtor—There are several reasons why debtors may wish to file one or more adversary proceedings in their own bankruptcy case. The most common motive is to seek redress or to recover damages in situations in which a creditor has violated either the automatic stay, which prevents creditors from pursuing debts once bankruptcy has been filed, or the discharge injunction, which states that former creditors are no longer allowed to attempt to collect discharged debts. Another type of debtor-initiated adversary proceeding occurs in situations where a debtor has a second mortgage, or other type of junior lien, on his or her house. In this proceeding, known as “lien stripping,” the aim is to strip junior liens from the property and treat them instead as unsecured claims.
What is the procedure for filing and pursuing an adversary proceeding?
Depending on who is bringing the complaint and the allegations it contains, it may be possible to settle the matter out of court. An example of a case in which such a resolution might be appropriate is that of a creditor who wants to prevent a debt from being discharged, but the amount in question is a relatively small one. However, most adversary proceedings are of a more serious or complex nature, and usually require a trial in order to be resolved.