Many who consult us on bankruptcy issues are not in fact filing for bankruptcy. Some of our clients are creditors of a debtor who is filing for bankruptcy.
Maybe you were injured or wronged by someone. Did a contractor screw up a job at your house? Did someone promise to fix your roof and they never finished the job? Often people will get a judgment in district court and then the person they are pursuing files for bankruptcy.What Is an Adversary Proceeding?
An adversary proceeding is a lawsuit within the bankruptcy case that is used to determine whether debts can be discharged. When someone files for bankruptcy in the United State Bankruptcy Court, it “stays” or stops all state court (and other federal court) proceedings.
That means if you have a judgment or even a payment plan with a debtor and they file for bankruptcy, you have to stop everything you are doing. You can no longer pursue them in the state court or even to call them and ask where your money is. If you do so, you face stiff monetary penalties in the bankruptcy court for violating the stay order.So What Are Your Options?
One option is to file an adversary proceeding. When someone is listed as a creditor, they receive notice of the filing in the mail. That mail will inform the creditor about the Section 341 meeting that is hosted by the trustee which usually occurs within 45 days of the debtor filing for bankruptcy. A creditor will generally have to file an adversary proceeding within 60 days of that meeting.Why Does It Matter?
Most debts are forgiven in bankruptcy in a Chapter 7 bankruptcy. The typical debts that are not automatically forgiven include student loans, some taxes, and criminal restitution.
If it is a Chapter 13 bankruptcy, the remainder of the debt will be forgiven after the debtor makes their payments to the Trustee over three to five years. If the creditor wants to contest that debt being discharged in a Chapter 7 or Chapter 13 bankruptcy, it can only be done so through the adversary complaint process.
There are several grounds a creditor can claim in objecting to a discharge. The most common grounds for a creditor’s objection to a discharge are fraud, willful and malicious conduct, domestic support obligations, or theft.
An example of fraudulent behavior might be where a contractor promises to fix a roof, takes the money from the homeowner, delivers a couple of two-by-fours to the property, and then never shows up again. The contractor then files for bankruptcy listing the homeowner as a creditor on the petition.
In this case, the homeowner would file a complaint in the bankruptcy court alleging the debt owed to them was acquired through fraud. Fraud in the contractor lying and promising to fix their roof when they never intended to do so.
A creditor is not the only individual who can file an adversary proceeding. The Trustee who oversees the debtor’s case can also object to the debtor’s petition. Some examples of when a trustee would object include where property of value was transferred within a year before filing for bankruptcy or if the debtor was deceitful on their petition.
For instance, imagine a debtor who 6 months prior to filing for relief transfers their house to their son for a nominal amount as to decrease the value of their assets. The trustee would file an adversary proceeding against the son to “unwind” the sale of property and theoretically access the equity in the home to satisfy the father’s creditors.At Marcotte Law Firm We Can Help
The Bankruptcy code is complicated and riddled with traps for the unwary. Adversary proceedings are difficult and require a litigator who is well versed in courtroom rules, evidentiary rules, and the bankruptcy code. Marcotte Law Firm has specialized attorneys who can help in defending or filing an adversary proceeding on your behalf.
Give us a call today for a free consultation, (978) 458-1229.