What Is An Adversarial Proceeding?
Normally, bankruptcy cases are not considered adversarial. Unlike a personal injury case, or a family law case, or a business law case, there are not two sides squaring off against each other, with one side winning and one side losing. In other words, bankruptcies are not what you would normally call “lawsuits.”
Granted, this is kind of a fiction—after all, the trustee’s job is to maximize recovery for your creditors, so it can often feel like it’s “you against the bankruptcy court,” but that is not the case. In fact, in bankruptcy court, most consumers will never step inside a courtroom, and a judge will never have to do more than sign paperwork.
But sometimes, it can be the case. This usually happens when your otherwise routine bankruptcy ends up being challenged, and the result is what is known as an adversary proceeding.
An adversary proceeding is where a creditor files a lawsuit against you in your bankruptcy case, to challenge your discharge, or some other relief that you may be asking from the bankruptcy court. Some examples of when this would happen include:
- A creditor that thinks their debt is not dischargeable
- A creditor that thinks you should not be able to discharge their debt because of fraud (either fraud when incurring the debt or loan, or fraud in something you’ve done or stated in the bankruptcy itself)
- A creditor feels that you have unfairly paid off one creditor before the bankruptcy
- The bankruptcy trustee wants to recover (“claw back”) property that you gave, sold or transferred to someone else, shortly before you filed your bankruptcy
- A creditor feels that their debt can’t be discharged, because they have a valid lien—that is, that their debt is secured by property
- The bankruptcy trustee has to file an action to divide or sever property that you own with someone else, before selling it
- You the consumer, file an adversary proceeding to convince the court that debt should be dischargeable (this often happens with student loans)
What Happens When an Adversary Proceeding is Filed?
If an adversary proceeding is filed, the normal pathway to discharge takes a diversion to resolve the contested issue first. This is one time when a bankruptcy discharge in a Chapter 7 can take longer than the usual 3-6 months. The issues in the adversary proceeding have to be resolved before the discharge can be entered.
The case proceeds like any lawsuit filed in federal court would, which is why it’s a good idea to have an experienced bankruptcy attorney with you. The parties will have a right to object, and to get information from the other side in the form of discovery. You may have to have your deposition taken, and you’ll be able to depose the other side as well.
An adversary proceeding must be filed within 60 days of your 341 meeting (meeting of creditors). So the meeting starts the clock.
Although this all may seem complex and somewhat frightening, the reality is that adversarial proceedings are not the norm, they are the exception. In fact, they are usually avoided by good planning and preparation before your case is even filed.