What is an Adversary Proceeding?

Adversary hearings are an option for debtors, creditors and bankruptcy trustees.

Adversary proceedings, in which a hearing or trial takes place before a judge, are not common in bankruptcy cases, but they are a potential step in the process that debtors need to be ready to face.

Such court proceedings can only be filed by the debtors, their creditors or the bankruptcy trustee who is assigned to the case by the U.S. Bankruptcy Court. Among the three, creditors are most likely to request an adversary hearing in order to argue that the money they are owed should not be discharged. They can argue that the debt was the result of fraud or malicious activity or that the bankruptcy petition was filed in bad faith, according to Oregon attorney Karen Oakes, writing for the Bankruptcy Law Network.

When an adversary proceeding is filed by the trustee, their arguments may be that the debtor presented fraudulent information to the court, that the petition was not accurately filed or that a court date was missed without good cause.

"Trustees [also] file adversary proceedings against creditors to avoid preferences or fraudulent transfers in instances where a creditor received funds or property from a debtor inappropriately, and the trustee seeks to undo the transaction and recoup funds," according to Attorneys.com.

Adversary proceedings are an opportunity for the trustee to convert a Chapter 13 Bankruptcy to a Chapter 7 case if the trustee believes it was initially done in bad faith. Such conversions also are sought if the trustee believes the case is ineligible for liquidation or the debtor doesn't have the ability to repay creditors through a court-ordered payment plan that is required in a Chapter 13 Bankruptcy.

When a debtor files against a creditor, it may be to recover money that the creditor received in violation of bankruptcy regulations. More commonly, a debtor pursues an adversary proceeding because the creditor has violated the bankruptcy petition's automatic stay, which halts any collection efforts and lawsuits filed against the debtor.

In addition, some debtors rely on the adversary proceedings to claim a hardship discharge from student loans or other forms of debt that are not covered by bankruptcy, or to have a lien removed from their property.

"In any adversary proceeding, just because one is filed, it doesn't mean that the filer will win the case against the other party," writes Oakes on the law network's website. "That is the judge's job - to determine who is right and who is wrong."

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