In an ideal world your bankruptcy filing should be plain sailing, with both sides agreeable to the final outcome and the courts findings and final decision, and in most cases that\’s exactly what happens.
Unfortunately money is a very powerful motivator for human beings, and can cause separate lawsuits to be raised as part of a bankruptcy case. These separate lawsuits are referred to as \’adversary proceedings\’ and can involve you, the trustee or one of your creditors initiating a suit against you or your bankruptcy estate. The person initiating the suit is the plaintiff, and the person defending themselves in the suit is the defendant.
The Process
When you, the trustee or a creditor makes a complaint to the court via a lawsuit you are effectively asking the court to make a decision based on this. The plaintiff will serve the person being sued with a copy of the complaint. The person being sued has thirty five days (35) days to respond to the suit, but if they simply ignore it then the court will enter a default judgment, usually siding with the plaintiff.
Types of Adversary Proceedings
There are a number of different reasons for an adversary proceeding to take place, with each individual reason usually being used by specific parties. We\’re going to categorize the reasons for this type of lawsuit based on the people, or persons, involved:
Trustee
Fraudulent Transfer – A trustee can initiate this type of adversary proceeding if they find that you (the debtor) have transferred money or other assets to another party prior to filing for bankruptcy. This is a serious type of fraud, which if proven is likely to have your bankruptcy case dismissed, and may also involve a prison sentence.
Preferential Transfer – In cases where you paid any creditor up to $600 within 90 days of your filing for bankruptcy the trustee may be able to reclaim that money from your creditors by suing them. This can only take place if the trustee can prove that you received nothing in return for the amount paid, and also that you were financially insolvent at the time.
Sale of jointly owned property – Any property you jointly own with another person can be split apart with an adversary proceeding, and then sold as part of the trustee\’s duty of repaying your debts to your creditors.
Creditor
Discharge ability of debt – If a creditor can prove that you incurred your debt fraudulently (providing false financial documents, for example) they can then file an adversary proceeding to have your debt discharge denied by the court.
Adversary Proceedings in Bankruptcy: How Do They Work?
Mortgage Stripping – Due to the property value implosion from 2008 onwards many homes now have multiple mortgages on them, often with values far in excess of the property itself. If you, or the courts, can prove that your primary mortgage is greater than the fair market value of your home then second and third mortgages can be converted to unsecured debts, and then either included in your repayment plan or completely discharged.
The most critical adversary proceeding which can be brought forward by a creditor or the trustee is the \’Objection to discharge\’, which means that somebody is objecting to you being able to discharge some, or all, of your debts. The most common reason for an ‘objection to discharge’ proceeding to be brought before the courts is in cases of bankruptcy fraud.
As we mentioned earlier adversary proceedings are rare, but they do happen often enough for them to be worth mentioning in this article. The caveat here is that bankruptcy fraud is a really bad idea, on a lot of levels.