Adversary proceedings refer to lawsuits filed within a filed bankruptcy case. They can be brought by a “party in interest” such as a creditor, by the trustee or by the debtor.
A creditor can file an adversary proceeding to object to the discharge of its debt, which must be done within 60 days of the 341(a) meeting. The objection can be based on the fact that the debt was incurred as a result of:
- Willful or malicious injury to property or persons
- Personal injury caused in a drunk driving accident
- Bad faith
An example of fraud or bad faith is purchasing luxury items on credit totaling over $650 within 90 days of filing. You are presumed insolvent during this period and since these items are not necessary for support, the debt is nondischargeable unless you can prove otherwise.
Taking out cash advances of at least $925 within 70 days of filing is similar to the purchase of non-essential goods and considered non-dischargeable as well.
Another example of alleged fraud is incurring a debt with no intention of repaying it. This can occur when taking out a credit card and incurring large expenses within a short period of filing and never paying any of it back. Fraud in this instance is not easily proved and if the debtor has any record of payments or evidence that a serious accident or illness prevented them from paying, the objection will likely fail.
Another objection to discharge is using a credit card to pay a non-dischargeable debt such as paying off a tax debt with your card. You are not permitted to incur a dischargeable debt to pay off a non-dischargeable debt.
Finally, if you lied or failed to fully disclose assets on your petition, you risk not only having the petition dismissed with no debts discharged, but criminal prosecution as well.
Proceedings by the Trustee
The trustee can also bring an adversarial proceeding. This is generally done to recover property or funds that is considered a fraudulent transfer. For example, if you transferred considerable funds or property to a relative within one year of filing or to a friend within 90 days for the purpose of delaying, hindering or preventing it from being seized and distributed to creditors, it is considered fraudulent.
A more common example is transferring property or selling it at below market or its reasonably equivalent value while you were insolvent. Also, if you intended to incur the debt with no ability to pay it back or made the transaction with a business insider for that person’s benefit, this could be considered fraudulent and the trustee could seek to void the transaction. Failing to list all your property or assets in your petition is also grounds for a trustee to file an adversary proceeding if the trustee can prove that the failure to disclose was intentional and meant to defraud creditors.
Proceedings by the Debtor
A debtor can file an adversary proceeding to determine if a debt is dischargeable. For example, you can assert that a student loan is dischargeable because of extreme circumstances making repayment a financial hardship. This could be a serious illness or injury or catastrophic incident. A creditor whose debt has been discharged but continues to attempt collection is in violation of the permanent injunction against such activities. The debtor can bring an adversarial action for the court to examine and hold the creditor in contempt.