What is an Adversary Proceeding in Bankruptcy?

In the course of a bankruptcy, disputes may arise among the debtor, creditors and/or the trustee. If the parties cannot amicably resolve them, one of the parties may initiate an adversary proceeding, which may be thought of as a case within a case.

An adversary proceeding is similar to a civil lawsuit but it is filed in bankruptcy court, either by a creditor, the trustee or the debtor. Creditors may claim that a specific debt or all of the debts in question should not be discharged. A creditor may also allege that the debtor has committed fraud, a breach of fiduciary duty, theft of funds or property or embezzlement.

The trustee can start an adversary proceeding on the grounds that the debtor has improperly transferred property to a third party or to one of the creditors, has concealed property from the court and parties, has failed to provide all of the required information to the court or has violated a court order.

The trustee may also start an action against a third party who allegedly has received property from the debtor in an improper transfer. The trustee’s action will attempt to retrieve that property and include it in the bankruptcy estate.

The debtor may file an adversary proceeding alleging that one or more creditors has violated the automatic stay by failing to stop collection efforts.

The party initiating an adversary proceeding prepares and files a complaint describing the property in question and the nature of the claim. The party accused of improper actions must then file a response to the complaint or risk having the bankruptcy judge issue a default judgment in favor of the complaining party.

As in a civil lawsuit, the parties conduct discovery, interrogatories are served and answered, documents are exchanged and depositions are taken. Motions for summary judgment may be filed. Since 2013, the New Jersey bankruptcy court has required parties in adversary proceedings to submit to court-supervised non-binding mediation. The parties jointly select the mediator and share the mediation costs.

If the parties cannot settle the matter, a trial is conducted by the bankruptcy judge. The judge will issue an order, which may be appealed to a U.S. district judge. Once the order is final, the bankruptcy will continue unless the court rules that none of the debts are dischargeable.

If you are under financial distress and are considering seeking bankruptcy protection, talk to an attorney at the Law Offices of James C. Zimmermann. Arrange a free attorney consultation by calling 973-764-1633 or contacting us online. Our offices are conveniently located in Hackensack, Vernon, Wayne, Pompton Lakes and Nutley, New Jersey.