Filing for bankruptcy is much like applying for a driver’s license—in most cases, all that’s needed for success is that you complete the requirements. In fact, most debtors never set foot in a courtroom. So even though someone who files for bankruptcy might have many creditors, it’s rare for the process to be adversarial. But, disputes can arise, and if one does, the bankruptcy judge will intervene, and the controversy will get resolved like other types of litigation.
In broad terms, two types of bankruptcy litigation exist: contested matters and adversary proceedings. They differ in complexity and how the court will handle them under the bankruptcy procedural rules.
An adversary proceeding is a separate case (with its own case number) that is related to the primary bankruptcy matter. Much like other types of lawsuits, the person bringing the action is the plaintiff, and the person defending the action is the “defendant.”
The case moves forward as a lawsuit, with each side having the right to obtain evidence through discovery. Ultimately, the case will get decided by a judge or a jury if the litigants don’t settle beforehand.
You can file virtually any issue in a bankruptcy case as an adversary proceeding. Under Rule 7001 of the Federal Bankruptcy Procedure Rules, a few matters must be resolved through the adversary process. Those cases include disputes to:
The rule includes other actions, as well. For more about adversary proceedings, read What Are the Differences Between Core and Non-Core Litigation?
Contested matters usually involve conduct occurring in the bankruptcy case itself. They’re relatively simple disputes; however, if a contested matter escalates in complexity, the bankruptcy judge has the power to convert it into an adversary proceeding.
Most contested matters get filed with the court as motions or objections and the people involved don’t engage in formal discovery (although it is possible with court permission). The opposing side will usually have the opportunity to respond, and the judge decides the matter using a hearing process.
Some common contested matters include:
Many things can be objected to in bankruptcy, including a creditor’s proof of claim for payment, a debtor’s proposed Chapter 13 plan, or a debtor’s use of a particular property exemption to protect an asset.
The judge can enter a judgment or another decision in both an adversary proceeding and a contested matter, and most can be appealed. Once filed, a decision by the bankruptcy court will usually be reviewed by the U.S. District Court or a bankruptcy appellate panel (depending on the circuit). From there, a litigant can appeal a case to the U.S. Circuit Court of Appeals, and ultimately, to the U.S. Supreme Court.
A small number of decisions move directly from the bankruptcy court to the U.S. Circuit Court of Appeals. Most litigation of this nature is handled by a competent bankruptcy litigation lawyer.