Conflict May Arise with Creditors in Bankruptcy

The vast majority of bankruptcy filings in Sacramento and Northern California go through the system smoothly. However, there are many situations that can arise in a bankruptcy case that involve conflict between a creditor, the debtor, and/or the trustee. Many times, these conflicts must be resolved in bankruptcy court in front of a judge. Complex conflicts often result in the filing of an “adversary proceeding.”

An “adversary proceeding” is essentially a lawsuit within the bankruptcy case and the rules governing such proceedings closely parallel the Federal Rules of Civil Procedure, requiring the proceeding to be commenced by a complaint, providing federal civil discovery procedure and the like. Other proceedings in bankruptcy are called “contested matters,” essentially treated as motions within the main bankruptcy case.

Adversary proceedings are just what they sound like – two sides are adversaries and have to duke it out in bankruptcy court. Three parties can file an adversary proceeding in a bankruptcy court case, which brings someone in front of the judge to make arguments in a hearing or a trial: the trustee (either the trustee for the case or the United State Trustee), the creditor, and the debtor. In every adversary proceeding situation, issues are presented to the judge who will make a decision to resolve the conflict.

The first type of adversary proceeding is the kind filed by the trustee of the particular case or the United State Trustee. The trustee could file an adversary proceeding or contested matter against the debtor or the creditor. Some examples or when the trustee argues that the documents were not filled out properly or filed on time, or even that the documents were filled out fraudulently. The trustee could file one against a creditor to try to collect money back that the creditor had received from the debtor. The U.S. Trustee can file adversary proceedings to force the debtor to convert from a Chapter 7 bankruptcy to a Chapter 13 if she believes that the filing was in bad faith. The U.S. Trustee can also seek to dismiss the case if she feels that the filing of the bankruptcy petition was done to abuse the system.

A common adversary proceeding filed by a creditor is one in which the creditor is arguing that the debt owed should not be discharged in the bankruptcy. This can happen if the credit thinks that the debt falls within one of the exceptions to discharge. Some of those exceptions are related to debt created by fraud, willful or malicious injury, or injury caused by drunk driving. The creditor could also argue that the bankruptcy case was filed in bad faith. These kinds of adversary proceedings don’t happen very often. That is, as long as the client is honest with their attorney about everything, the attorney will likely have warned the client that an adversary proceeding of this type might be forthcoming.

Finally, the debtor can file an adversary proceeding against a creditor to recover damages for violation of the discharge injunction or automatic stay. An adversary proceeding may also help a debtor discharge student loans in certain situations.

An adversary proceeding is typically more complicated than a usual bankruptcy proceeding. Because it will likely be hotly contested before a judge, it can be very difficult for a consumer to handle without sufficient counsel. Thus, adversary proceedings are yet another reason to seek an experienced bankruptcy attorney.