An adversary proceeding is a lawsuit that is part of a bankruptcy case. Most cases do not involve an adversary proceeding. This is because adversary proceedings are not necessary for you to get a discharge. An adversary proceeding functions like any other lawsuit. There is a plaintiff and a defendant. The plaintiff is the party that starts the case and who seeks to recover something from the defendant. The defendant is the party that is defending the adversary proceeding and is trying not to lose anything. Sometimes a defendant may also have a claim against the plaintiff; this is called a cross claim. Basically, if there is a cross claim than each side plays the role of both plaintiff and defendant.
First, very few of my clients even need to think about an adversary proceeding. For the purposes of this article, I’ve divided adversary proceedings into two categories: 1) Debtor is the plaintiff, and 2) Debtor is the defendant.
Debtor Is The Plaintiff – Adversary Proceedings Filed by Debtors
Debtors file adversary proceedings for two reasons: 1) to recover money or to release a lien, or 2) to get a non-dischargeable debt made dischargeable.
Adversary Proceedings to Recover Money or To Release a Lien
A debtor can use a bankruptcy to recover money from a creditor or get the release of a lien. This is a pretty broad category of adversary proceeding, but I’ll break it down into three main categories.
- Creditor Actions Before the Bankruptcy – If a creditor garnishes you or takes property from you in the 90 days before you file bankruptcy, you can often get that money or property through an adversary proceeding. This is called recovering a preferential transfer.
- Creditor’s Bad Acts – If a creditor violates lending laws, consumer protection laws, the Fair Debt Collections Practices Act, or other consumer regulations you can recover damages. Just because you file bankruptcy does not mean that a creditor can get away with violating the law. In fact, bankruptcy is sometimes the best forum to litigate these issues, because the automatic stay means that the creditor cannot take any further action against you.
- Releasing or Voiding A Lien – If a creditor’s lien is invalid, you can use an adversary proceeding to have it voided. This is particularly useful in the mortgage context, where you can strip off wholly unsecured mortgages or liens that are not properly perfected on your property
Making An Automatically Non-Dischargeable Debt Dischargeable
Almost all debts are automatically dischargeable. Basically, all you have to do is file the petition, attend the 341 meeting, and do the post-bankruptcy course, and you get the discharge. This general discharge covers virtually all debts, except for things like student loans, domestic support obligations, and certain taxes. Those three categories are called self-executing discharge exceptions. They are called self-executing because if you have something like a student loan or a domestic support obligation, it is automatically excluded from the discharge. The creditor doesn’t have to do anything. These self-executing discharge exceptions are the opposite of the discharge exceptions, where the creditor has to file an adversary proceeding and that I discuss in the next section.
Fortunately for debtors, there are only a limited number of self-executing discharge exceptions. This is because Congress wants the discharge to cover as many debts as possible. The few debts that are not automatically dischargeable require you to file an adversary proceeding to have the debt discharged. If you think that one of your debts is automatically non-dischargeable, you should talk to a bankruptcy lawyer about whether you should try to have it discharged. These debts must be reviewed on a case by case basis, so be wary of a lawyer that gives you an answer without looking at the facts.
Debtor Is The Defendant – Adversary Proceedings Filed By Creditors
A creditor can file an adversary proceeding against a debtor to take a debt out of the discharge. If the creditor wins the case, then that debt will not be discharged in your bankruptcy. A good Seattle – Kent bankruptcy lawyer can spot most adversary proceedings before you file. This is because Congress only gives creditors limited bases for objecting to the discharge of a debt.
The most common non-dischargeability lawsuit is one that is brought because of the debtor’s alleged fraud, and these are most often brought by credit card companies. In this context fraud means that at the time you incurred a debt, you had no intention of repaying it. Basically, if you incur a debt too close to the time that you file bankruptcy, a creditor will claim that it was the result of fraud. This does not make the entire debt non-dischargeable, only the parts of the debt that were incurred too close to the bankruptcy filing or under fraudulent circumstances are excepted from the discharge.
Probably the second most common non-dischargeability lawsuit come from personal injuries. If the debtor caused an injury to another person or their property, then it can be non-dischargeable if the injury was willful and malicious. For example, if the debtor hurt someone in a fist fight, that person might claim that the damages for their injury were non-dischargeable. The person making that claim, however, has to show that the injury was beyond simple negligence and that the debtor both willfully and maliciously caused the injury. Because the damages for these lawsuits can run into the thousands of dollars and because the injured party’s insurance company can take the case over, it is very important that you alert your Seattle – Kent bankruptcy lawyer to any personal injury lawsuits.
The idea that a debt can be taken out of the discharge is very distressing to a debtor, but you need to remember that this does not happen often. If you make sure to give your bankruptcy attorney all of the information about your debts, then your Seattle – Kent bankruptcy lawyer should be able to predict any non-dischargeability claims and help you avoid them in your bankruptcy case.