Adversary Proceeding: What it is & How it Works

When debtors file bankruptcy, they’ll have an opportunity to get rid of their debts and a fresh start. However, sometimes, a creditor can challenge whether the debtor should be allowed to discharge a particular debt. And there are other times when the debtor wants to get rid of debt they usually wouldn’t otherwise be able to eliminate.

An adversary proceeding is a tool that a creditor, debtor, bankruptcy trustee, or third party can use to determine the dischargeability of a debt after a debtor files a bankruptcy petition.

Here’s what you need to know about adversary proceedings in bankruptcy.

Note: If you’re looking for help with your student loan debt, book a call with me. I’ve helped many people across America do what their bankruptcy lawyer said couldn’t be done: discharge student loan debt.

An adversary proceeding in bankruptcy court is a separate lawsuit filed within a bankruptcy case. The purpose of an adversary proceeding is to discuss specific issues that arise during the bankruptcy process, such as determining the dischargeability of a debt, recovering property abandoned by the trustee, or objecting to the discharge of a debtor.

Adversary proceedings are governed by the Federal Rules of Bankruptcy Procedure and the local bankruptcy court rules where the case is pending. (The bankruptcy procedural rules incorporate the Federal Rules of Civil Procedure into bankruptcy litigation.)

These cases can involve state law, federal law, and bankruptcy law.

An adversary proceeding in bankruptcy court can be filed by a cast of characters — the debtor, the trustee, creditors, and any other parties with an interest in the outcome.

Like any legal battle, the rules of engagement are different in every jurisdiction, but generally, anyone with a direct stake in the proceedings can step up to the plate and kick off the adversary proceeding.

The AP starts when a plaintiff files a complaint against a defendant. The defendant will have an opportunity to answer. If they don’t, then a default judgment can be entered against them. But if they answer, litigation continues, and the parties will typically negotiate a settlement, or the bankruptcy judge will decide a winner.

Any dispute between two parties that doesn’t qualify as an adversary proceeding under the Bankruptcy Code is a contested matter. Any party in interest (debtor, creditor, trustee, etc.) can file a motion requesting relief of some sort.

Typically, a contested matter involves a creditor challenging the debtor’s use of an exemption to protect property from being sold to repay debts.

When the responding party objects to the motion, the matter is considered contested.

Like an adversary proceeding, a contested matter can involve discovery, depositions, trials, etc.

Bankruptcy law provides for different types of adversary proceedings. (11 U.S.C. § 523) Here’s a list of the more common APs filed.

• Student loan discharge. Borrowers can file a student loan adversary proceeding seeking to discharge their student loan due to undue hardship by showing they can’t maintain a minimal standard of living while repaying their debt. Most bankruptcy courts use the Brunner Test to determine if your circumstances call for an undue hardship discharge.

• Violation of automatic stay. Creditors are prohibited from trying to collect from a debtor after they file bankruptcy (e.g., foreclosure of real estate, repossession, report a discharged debt to the credit bureaus, etc.). Similarly, creditors aren’t allowed to collect for a debt that was discharged.

• Fraudulent transfer. Trustees will try to recover money or property they believe you fraudulently transferred within two years before filing bankruptcy.

• Preferential transfer. Trustees will try to recover money from creditors you paid more than $600 within 90 days before filing bankruptcy or within a year if you paid back a relative or friend.

• Lien stripping. Homeowners who file a chapter 13 will try to strip (remove) second, third, fourth, etc., mortgages from their property and treat those mortgages as unsecured claims.

• Dischargeability of a debt. Creditors can argue that debt is non-dischargeable if they believe you incurred the debt fraudulently.

• Sale of joint property. Trustees can try to sell nonexempt joint property you co-own to repay your creditors.

• Objection to discharge. Lenders, credit card companies, trustees, and the United States Trustee will try to stop you from getting a discharge if you committed fraud or violated court orders.

You start an adversary proceeding by filing an adversary complaint, which is a formal, written statement where you lay out the facts and ask the court for the relief you’re entitled to under the law. Depending on the nature of the lawsuit, you may need to pay a filing fee.

Although many complaints look similar, there’s no set form to follow. However, there are usually 5 things you must include in your complaint:

1. Caption. A caption that identifies the court, bankruptcy case and case number, and parties to the adversary.

2. Parties. A statement identifying the name and location of the parties involved in the AP and a description of the parties’ relationship that has given rise to the complaint.

3. Jurisdiction. The reason why the AP can be filed in bankruptcy court.

4. Allegations. The allegations/claims you’re making against the defendant.

5. Relief. The relief you’re seeking from the court. For example, in a complaint to discharge student loan debt, the borrower can argue they shouldn’t have to pay their student loan creditors because they can’t pay the loans and maintain a minimal standard of living.

In addition to the complaint, you must submit the Adversary Proceeding Cover Sheet and follow the bankruptcy court’s local rules.

Yes, filing an adversary proceeding after a bankruptcy discharge is possible. Think of it like this: an adversary proceeding is like a secondary battle within the larger war of the bankruptcy case.

It is a specific legal action taken to address individual issues, such as determining whether a debt can be discharged — e.g., federal or private student loans — or reclaiming property the trustee has given up on.

But make no mistake, like any battle, filing an adversary proceeding must abide by strict rules and regulations, including the Federal Rules of Bankruptcy Procedure and the specific guidelines set forth by the bankruptcy court where the case is taking place.

A defendant can respond to an adversary proceeding by filing an answer or a motion (e.g., a motion to dismiss the complaint) within 30 days from the date of the summons. If the defendant fails to file a responsive pleading, the bankruptcy judge can enter a default judgment against the defendant.

Depending on the type of adversary proceeding, losing could mean you still owe your lender for a debt. For example, you won’t be able to strip a junior mortgage, stop making student loan payments, etc. In some cases, losing an adversary won’t stop the bankruptcy process from moving forward. But in others, a loss could mean you’re not entitled to a discharge in your chapter 7 bankruptcy or chapter 13 bankruptcy case.

An adversary proceeding can be used to block the debtor’s discharge of a debt or help them get the debt relief they hoped to get when they filed bankruptcy. Talk with your bankruptcy attorney to learn more about how the adversary proceeding process works where you live.

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