Adversary Proceeding
In US law, an adversary proceeding can refer to two things. One refers to a process in general law, and the second refers to a type of action in bankruptcy court.
In general, an adversary proceeding can be any case where two parties decide to settle a dispute with the involvement of a third party. The third party is usually the court. The other parties involved include
- The Plaintiff: The person, partnership, or corporation that initiates the case.
- The Defendant: The person, partnership, or corporation that is being sued against.
During an adversary proceeding, the final decision will be made based on the evidence presented, whose standard meets those established by the court.
The other meaning for adversary proceeding is the commonly used one. An adversary proceeding in a bankruptcy case is when the parties involved decide to file a lawsuit to resolve the disputes that arise. Adversary proceedings don’t usually happen since most bankruptcy cases involve a lot of paperwork and are usually settled outside the court.
The parties involved in a bankruptcy case adversary proceeding are
- The creditor
- The trustor
- The debtor
The dispute that led to the adversary proceeding will be treated as a separate case. As a result, even if the dispute is resolved, the bankruptcy case still stays open for the court to deal with.
The parties involved in a bankruptcy case can use adversary proceedings to find a solution for the following issues:
- Find out the lien status or another property interest.
- Make orders to change the debtor’s discharge.
- Recover money or property.
- Decide the dischargeability of debt.
- Obtain an order to stop a particular action.
- Make a decision on the court shifting to a different court.
- Modify the order of creditor payments.
- Ask the judge’s opinion on the issue.
Types of Adversary Proceeding
Adversary proceedings are of 6 types. They are,
- Preferential transfer
- Dischargeability of debt
- Sale of the property where the owner has joint ownership
- Fraudulent transfers
- Lien stripping
- Objection to discharge
Preferential transfer
Preferential transfer is also known as a preference adversary and is usually filed by the bankruptcy trustee. This type of complaint is only applicable if the debtor has repaid more than $600 to any of the creditors. This must happen 90 days before the debtor filed for bankruptcy. The time period is increased to 1 year if the debtor paid back a relative.
It is also important for the trustee to prove that the debtor was unable to pay back when the transfer happened and that the debtor didn’t receive anything in return. The trustee must also prove that during the transfer, the creditor received a sum that is more than what they would have gotten in Chapter 7.
Dischargeability of debt
This is filed by the creditor. Dischargeability of debt is when the creditor makes a request to not discharge a debt. This is done because the complaint claims that the debt was incurred fraudulently.
Sale of property where the owner has joint ownership
One of the adversary trustee’s responsibilities is to sell the debtor’s property to pay back the creditor. The trustee can file an adversary complaint when the debtor owns property that is partly owned by someone else. When this happens, the debtor will have to share the interest with the co-owner. This usually leads to the co-owner selling their share of the property.
Fraudulent transfers
A fraudulent transfer adversary complaint is when the debtor had transferred money or property to another individual or organization within 2 years of filing for bankruptcy. This is a case in which the trustee has to prove that the debtor committed fraud.
Lien stripping
Lien stripping is only applicable when the debtor files a Chapter 13 bankruptcy and has more than 1 mortgage on their house. In such an event, the debtor can file an adversary proceeding to remove the junior mortgages from the property and consider them unsecured claims. This is applicable only as long as the house is worth less than the sum due on the first mortgage.
Objection to discharge
The parties who can file an objection to discharge adversary complaint are,
- The creditors
- The trustee
- The Office of the United States Trustee
The purpose of this adversary complaint is to deny the debtor’s discharge, claiming that they disobeyed court orders or committed fraud.
