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What Is an Adversary Proceeding in Bankruptcy?

By Walter Metzen

An Adversary Proceeding is, essentially, a separate lawsuit filed within your bankruptcy case.

It is a common misconception that the filing of a Chapter 7 or Chapter 13 bankruptcy is a matter of mere form-filling. That is, people tend to think that it is a “lawyer-optional” legal process.

 

How hard is it to fill in some forms, after all?

 

Nothing could be further from the truth.

 

While, certainly, a bankruptcy case is initiated with the filing of the “forms” comprising the bankruptcy petition, attached schedules, statements, exhibits, Means Test, and (where applicable) a Chapter 13 Plan, that is simply the start of the process.

 

A consumer Chapter 7 or Chapter 13 case can, and often does, “get ugly.”

 

What does “ugly” mean in the legal context?

 

It means litigation.

 

It is also worth remembering that bankruptcy is a Federal legal process, not a Michigan state court-based or county court-based process.

 

Thus, “getting ugly” within your Chapter 7 or Chapter 13 proceeding means that you are litigating in Federal court.

 

Doesn’t that sound like something for which you’d need a good lawyer? (Hint: we think so!)

 

Litigation in the bankruptcy context can occur as the result of a need to file or respond to a motion. It can also occur, however, in a more formalistic form known as an Adversary Proceeding.

 

The Adversary Proceeding Defined

 

An Adversary Proceeding is, essentially, a separate lawsuit filed within your bankruptcy case.

 

It can be filed by yourself, against a creditor or another party in interest, or it can be filed by a creditor or other party in interest against you.

 

It unfolds “within” your bankruptcy case, but the Bankruptcy Court will assign the Adversary Proceeding its own case number.

 

The same judge assigned to your underlying Chapter 7 or Chapter 13 case is also assigned to the related Adversary Proceeding.

 

The underlying bankruptcy case will not be administratively closed nor, often, will a discharge be awarded until the Adversary Proceeding is resolved.

 

While the typical Chapter 7 bankruptcy case lasts approximately 4 months, an Adversary Proceeding can stretch on for years.

 

Adversary Proceedings are governed by a separate set of the Federal Rules of Bankruptcy Procedures. These Rules set timelines, deadlines, the form of pleadings filed, drive the stages of the litigation, and set penalties for parties who do not abide by the Rules—among other things.

 

Like any lawsuit, an Adversary Proceeding is initiated with the filing of a Complaint against the other party or parties. That Complaint must be properly served upon those parties, and a proof of that service must be filed with the Bankruptcy Court according to the method and within the timeframe established by the Adversary Rules noted above.

 

Depending on the Adversary Rules and depending on the specifics of your Local Bankruptcy Court Rules, certain types of actions or claims within a bankruptcy case can only be brought via the filing of an Adversary Proceeding and cannot be resolved with the filing of a motion.

 

An adversary proceeding against you, the debtor, must be filed within 60 days of the date of your 341 Meeting of Creditors.

 

Required Adversary Proceeding Actions

 

What actions must be resolved by way of an Adversary Proceeding?

 

One of those most common types of Adversary Proceedings is an action to determine whether or not a debt is or is not dischargeable.

 

This action might be brought by you, in order to seek a judicial order granting a discharge of student loan debt.

 

It might be brought by your ex-spouse in order to obtain an order confirming that your child support obligation is not discharged.

 

It might also be brought by a creditor who believes that you incurred a debt fraudulently. (Fraudulently incurred debts are not dischargeable in bankruptcy—if a creditor can prove that to a judge’s satisfaction in an adversary proceeding.)

 

Another common Adversary Proceeding is an action to object to or revoke a debtor’s discharge.

 

Although certain bases for objecting to a debtor’s right to discharge do not require an Adversary Proceeding, such an action must typically be brought as an Adversary Proceeding.

 

The right to a discharge is presumed to belong to the Debtor pursuant to the Bankruptcy Code, and it will be the objector’s burden to prove otherwise.

 

Likewise, an action to revoke the confirmation (court approval) of a Chapter 13 Plan must also be brought via Adversary Proceeding in most cases.

 

In many Bankruptcy Court jurisdictions, an action brought by a debtor against a creditor seeking sanctions and money damages must also be brought by way of an Adversary Proceeding.

 

In the Eastern District of Michigan, however, this action, depending upon the circumstances, can be brought by motion.

 

A so-called Preference Action can also initiate an Adversary Proceeding.

 

This is an action, typically brought by a Chapter 7 Bankruptcy Trustee to recover “excess funds” paid by debtors to certain creditors prior to the filing of the bankruptcy case.

 

For example, if you repay your grandmother the $2,000 you owe her 6 months before you file, a Chapter 7 Trustee will demand that $2,000 back from grandma. If she refuses, litigation will be the result.

 

Likewise, a fraudulent transfer avoidance (recovery) action brought by a Trustee must also be filed as an Adversary Proceeding.

 

This will be an action to recover money or property to whom it was transferred by the filing debtor prior to the commencement of the bankruptcy case for “less than equivalent value.”

 

Thus, if you title your Corvette over to your brother-in-law for $1.00 before filing for Chapter 7 bankruptcy, your brother-in-law will soon be on the receiving end of an Adversary Proceeding.

 

There are many other such actions, as well.

 

Whether a motion or Adversary Proceeding is the best way to bring a claim within your own or another’s bankruptcy case is always a subject worth discussing with an experienced Michigan bankruptcy lawyer.

 

Bankruptcy Adversary Proceedings: The Bottom Line

 

The bottom line with regard to the Bankruptcy Adversary Proceeding is that, if you are researching them, you probably need to speak with a lawyer.

 

Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented thousands of Chapter 7 and Chapter 13 clients for over 28 years.

 

Attorney Metzen has the seasoned expertise to litigate your Adversary Proceeding to as successful a conclusion as your facts will allow.

 

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