Most bankruptcy debtors never see the inside of a courtroom, and it's rare for a judge to be called on to resolve a disagreement. Why? Because bankruptcy is primarily a paperwork process. Even so, disputes can arise, and if complicated enough, the person bringing the action will file a separate lawsuit known as an "adversary proceeding" instead of a simpler "contested matter."
But the rules can be confusing, so you'll want to know the following:
We explain all of this and provide you with examples of commonly filed adversary proceedings and an explanation of the law used during the bankruptcy process.
Some issues in a bankruptcy case are more straightforward than others. If it requires a hearing and decision from the judge but not extensive evidence (and the subject doesn't appear on the Rule 7001 list—more below), it can proceed as a "contested matter."
A contested matter often starts with the filing of a motion requesting that the court take some action. Discovery doesn't occur without the court's permission, and if the parties can't settle their differences, the judge will make a ruling. Regarding time, effort, and expense, contested matters are much quicker to resolve—weeks instead of months or years—and cheaper.
A judge would resolve the following requests as a contested matter:
When given a choice, most people would prefer to resolve other issues through the contested matter process and avoid the full-blown litigation required by an adversary proceeding.
A bankruptcy debtor, trustee, or creditor can resolve any issue by adversary proceeding; however, the bankruptcy rules set out seven types of cases that a plaintiff must file this way. (FRBP 7001.) For instance, the court requires an adversary proceeding to:
Also, if you would have filed the action in another court before filing for bankruptcy, such as a state court, you'd file it as an adversary proceeding. For instance, the court typically decides contract and business disputes through this process.
Example. You and your partner have a contract with Widgets, Inc. to purchase 1,000 ashtrays. You had received the order but hadn't paid for it when you filed an individual bankruptcy case. You contend that the partnership owes the debt, not you personally. If you weren't in bankruptcy, Widgets would file suit against you in a state court. Instead, it chooses to file an adversary proceeding against you in bankruptcy court.
Any bankruptcy controversy can be filed as an adversary proceeding. Here are some examples of commonly filed actions:
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 actual fraud or constructive bankruptcy fraud.
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 a relative). 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 Chapter 7. (Learn more about prebankruptcy payments or transfers to creditors.)
Lien stripping. Suppose you file a Chapter 13 bankruptcy and you have more than one mortgage on your house. In that case, you can file an adversary proceeding to strip the junior mortgages from your property and treat them as unsecured claims as long as your house is worth less than the balance due on the first mortgage. (For articles on lien stripping, see Your Home in Chapter 13.)
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.
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 (split apart) your interests and force the co-owner into selling the property.
Objection to discharge. Your creditors, the trustee, or the Office of the United States Trustee can file an adversary complaint to deny your entire discharge by alleging that you have committed fraud or that you have failed to comply with court orders.
A case can be filed by yourself, the trustee, or a creditor, but your interests will differ. Here's what you can expect.
Trustees. A trustee might use an adversary proceeding to force a creditor or third party to turn over property that they're holding for the debtor. It's also used to recover a preferential payment (money the debtor paid to a creditor shortly before filing for bankruptcy) or a fraudulent transfer (wherein the debtor changes property ownership to avoid paying a creditor).
Creditors. A creditor might file an adversary proceeding against a debtor to have a debt declared nondischargeable.
Debtors. A debtor might file an adversary proceeding to determine whether it's possible to wipe out taxes or student loans or ask the court to remove a lien from their property.
As with other lawsuits, the case starts when the plaintiff (the person filing the adversary proceeding) files a complaint (the legal document that outlines the problem) against a defendant (often the debtor). The complaint lists the lawsuit's facts and asks the court to enter a judgment based on the facts and the law.
When the plaintiff files the complaint, the clerk assigns the adversary proceeding a case number different from the bankruptcy case number. The court will issue a summons to be served with a copy of the complaint on the person sued (the defendant).
The defendant has a certain number of days to respond by addressing the allegations in the complaint. If the defendant doesn't file an answer by the deadline, the court will enter a default, and the plaintiff can obtain a default judgment.
From that point, the adversary case moves forward much like any other civil case. The plaintiff and defendant (the person sued) will likely:
As with other lawsuits, an appeal process is also available.
Here's where you'll find the law.
The law allowing for a Chapter 7 or Chapter 13 bankruptcy is in the bankruptcy code (Title 11 of the United States Code). The bankruptcy code defines who can file a bankruptcy case, the duties of the debtor and the trustee appointed to administer the case, what property is affected (state exemption law will also come into play), which debts will get discharged (wiped out) and which debts are nondischargeable, how a creditor makes a claim, and the order in which a creditor's proof of claim gets paid (priority debts are paid first).
You'll find an online copy of the bankruptcy code on the Cornell Law School website.
The Federal Rules of Bankruptcy Procedure provide instructions that help the courts carry out the bankruptcy law. Adversary proceedings follow a series of rules found in Part VII of the Federal Rules of Bankruptcy Procedure. These rules track the Federal Rules of Civil Procedure that governs civil lawsuits in other federal courts.
You'll look to Rule 9014 for guidance in contested matters. Rule 9014 incorporates some but not all of the Part VII rules used in adversary proceedings.
You can find a copy of the Federal Rules of Bankruptcy Procedure on the U.S. Courts website.
The bankruptcy court in each federal district has the authority to enact rules for the district. These rules often address procedures for bringing certain types of motions before the court, entering orders, setting briefing schedules, and filing local forms required in that jurisdiction.
Sometimes referred to by bankruptcy lawyers as the "local-local rules," most bankruptcy judges have their own rules of conduct in their courts. These often articulate the judge's personal preferences for conducting hearings, policies for handling emergency motions, telephone and video hearings, interaction with court staff, and other issues.
While it is possible to represent yourself in an adversary procedure, they're complicated. A local, knowledgeable bankruptcy attorney can advise you of the best course of action.