What is an adversary proceeding?

August 26, 2020
What is an adversary proceeding?

When debtors file for bankruptcy protection, most lawsuits and collection actions filed against the debtor must be put on hold.  However, the filing of a bankruptcy can give creditors and other parties the right to file lawsuits inside the bankruptcy against the debtor – and give debtors the right to file suit against other parties.  These lawsuits within bankruptcy are called adversary proceedings.

Adversary proceedings have their own set of rules in the Federal Rules of Bankruptcy Procedure and can have a really big impact on someone’s case.  So it’s important to have competent counsel if you plan on filing an adversary proceeding or defending yourself from one.  This is true whether you are a debtor, a creditor, or some other party.

Some examples of adversary proceedings:

* Joe and Jill Smith file a Chapter 13 bankruptcy.  They own a home they value at $150,000.  They owe Bank of Chase Mortgage $165,000 on their first mortgage, and Citi USA $25,000 on their second mortgage.  They can file an adversary to get a bankruptcy court ruling that the second mortgage is wholly unsecured, and therefore can be “stripped” within the bankruptcy if they obtain a discharge and complete their Chapter 13 plan.

* Debra Debtor files a Chapter 13 bankruptcy and asks the Bankruptcy Court, through an adversary proceeding, to rule that certain payments listed in her divorce decree from her ex-husband, Eric,are not in the nature of a domestic support obligation.  If she is successful, she can discharge her liability from these debts, notwithstanding what the divorce agreement says.

* Eric Jones files a Chapter 7 Bankruptcy but fails to disclose his interest in an LLC, some jewelry, a boat, and a bank account.  The Chapter 7 trustee and United States Trustee discuss the case and agree that one or both parties will file an adversary proceeding to deny Eric a discharge of debts due to his failures to disclose.

In each case, the debtors (and other parties) would benefit from having counsel who understand the substantive law and the rules and formalities that govern adversary actions.  Filing a bankruptcy and having a discharge denied is a very bad outcome.  Losing one’s ability to enforce a divorce decree is a bad outcome.

At WM Law, we file adversary proceedings on behalf of our bankruptcy clients.  We also represent creditors and third parties (like people who have purchased or received property as gifts from debtors) in adversary actions.  Before trying to argue sophisticated federal law and procedure yourself, please contact us to discuss the merits of your case and the costs and benefits of pursuing (or not pursuing) an adversary proceeding.