Adversarial proceedings in bankruptcy court
April 19, 2012
An adversarial proceeding in bankruptcy court involves a dispute between two parties during the course of a bankruptcy. During the recession, there has been a rise in adversarial proceedings because bankruptcy has become a common phenomenon and has affected many people in all types of financial situations.
An adversary proceeding involves three parties to the bankruptcy: the creditor, the trustee and the debtor, and any of the three can initiate the process if they feel wronged during the course of a bankruptcy.
There are three types of adversary proceedings. In the first type of adversary proceeding, the creditor argues that the debt owed to it should not be discharged through the bankruptcy. For example, a creditor can argue that the debt owed is an exception to bankruptcy discharge because it was the result of fraud. A creditor may also bring an adversary proceeding when it believes the bankruptcy was filed in bad faith.
The second type of adversary proceeding may be filed by a bankruptcy trustee for several reasons. The trustee could argue that schedules were not filled out properly or were intentionally fraudulent. The trustee may also file an adversary proceeding in order to get money back from a creditor after it received property or money from a debtor that was not in line with the bankruptcy proceedings. In addition, the trustee may file an adversary proceeding in order to undo the transfer of real property, or have the debtor’s bankruptcy shifted from Chapter 7 to Chapter 13 if they feel bad faith is involved.
The third type of adversary proceeding is when the debtor files against the creditor. The debtor may get damages from the creditor because the creditor took action in violation of the U.S. Bankruptcy code, violated the automatic stay or violated the discharge injunction. In other words, if the creditor attempts (unlawfully) to collect money or property from the debtor during the bankruptcy proceedings, the debtor may bring an adversary proceeding to stop the creditor’s actions.