An adversary proceeding in bankruptcy is a lawsuit filed within the debtor’s bankruptcy case. Any party can file an adversary proceeding in a bankruptcy — the trustee, a creditor, or the debtor. The purpose of an adversary proceeding is to obtain some form of relief that requires a judge’s attention and cannot be accomplished through the routine bankruptcy case itself.
An adversary proceeding starts when the person who is suing (the plaintiff) files a complaint with the bankruptcy court. Once the defendant is served with the complaint, s/he has a certain number of days to respond,. To respond, the defendant must file a written answer. If the defendant does not file an answer on or before the deadline, the court will enter a default, and the plaintiff can obtain a default judgment. Otherwise the adversary case will be decided on the merits by trial or dispositive motion.
Some of the most common adversary proceedings are by the trustee to set aside a fraudulent transfer of the debtor’s assets or to undo a preferential transfer. A creditor can file an adversary complaint requesting that the court not discharge its debt because it alleges that the debtor incurred the debt fraudulently, either by actual fraud or constructive fraud. A Chapter 13 debtor who has more than one mortgage on his/her home can file an adversary proceeding to strip the junior mortgages from the home and treat them as unsecured claims as long as the home is worth less than the balance due on the first mortgage. Also, if the debtor owns property jointly with someone else, the trustee can file an adversary complaint to separate the debtor’s interest and force the co-owner into selling the property. Adversary proceedings can also be used in special cases to discharge student loans.
Call Mr. Whelan today for further information on adversary proceedings and bankruptcy in general.