An adversary proceeding in bankruptcy is a separate lawsuit filed within your bankruptcy case. While it remains a part of your bankruptcy case, it has its own separate case number, and you may have a different attorney. Any party in interest can file an adversary proceeding in a bankruptcy. The purpose of an adversary proceeding is to obtain some form of relief that requires a judge's attention and cannot be accomplished through a court motion. Like most lawsuits, it starts when someone (the creditor, the bankruptcy trustee, or the debtor) files a complaint. Many bankruptcies go through to completion and discharge without any adversary proceedings. But not so in others.
A creditor might bring an adversary proceeding to challenge the dischargeability of a particular debt, alleging that you incurred the debt through fraud. Or the trustee might seek to regain property that you transferred or sold to someone else for less than fair market value prior to your bankruptcy.
A plaintiff can file any controversy in a bankruptcy case as an adversary proceeding, but the bankruptcy rules set out certain types of cases that a plaintiff must file this way, such as: recovery of money or property; to determine the extent of a property interest and to ask the court to deny or rescind a discharge of a debt or the entire case.
How Adversary Proceedings WorkAn adversary proceeding starts when the person who is suing files a complaint with the bankruptcy court. The complaint lists the facts that pertain to the lawsuit and asks the court to enter a judgment based on the facts and the law. When the plaintiff files the complaint, the court will issue a summons, which the plaintiff must serve upon the person being sued, along with a copy of the complaint. Once the defendant receives the complaint, he or she has 30 days from the issuance of the summons to respond. To respond, the defendant must file an answer, which responds to the allegations in the complaint. If the defendant does not file an answer on or before the deadline, the plaintiff can request the court clerk enter a default, and the plaintiff can obtain a default judgment.
Common Types of Adversary ProceedingsThere are multiple reasons to file an adversary proceeding. The most common types include:
1. Fraudulent transfers. The bankruptcy trustee can file a fraudulent transfer adversary complaint if you transfer any money or property to another within two years before filing your bankruptcy, if the trustee can prove either actual fraud or constructive fraud.
2. Preferential transfers. The bankruptcy trustee can file a preferential transfer adversary complaint, also known as a preference adversary, if you repaid any of your creditors more than $600 within 90 days before you filed bankruptcy (or one year if you paid back an insider, who is generally a relative or business associate). The trustee must also prove that you were insolvent at the time of the transfer, that you did not receive anything in return and that the transfer gave the creditor more than it would have received in a Chapter 7.
3. Dischargeability of debt. A creditor can file an adversary complaint requesting that the court not discharge its debt because it alleges that you incurred the debt fraudulently, either by actual fraud or constructive fraud or is a personal injury as a result of driving under the influence.
4. Sale of property jointly owned by the debtor. The trustee's duties include selling any nonexempt property for the benefit of your creditors. If you own property jointly with someone else, the trustee can file an adversary complaint to sever your interests and force the co-owner into selling the property.
5. Objection to discharge. Creditors, the trustee, or the Office of the United States Trustee can file an adversary complaint to deny a debtor their entire discharge by alleging that the debtor committed fraud or that the debtor has failed to comply with court orders. I have successfully represented creditors, debtors and Chapter 7 trustees in a wide variety of Adversary Proceedings in the Eastern District of California.
