Adversary proceedings are separate lawsuits within a bankruptcy proceeding. Creditors who feel they were misled about a debtor’s ability to repay at the time monies were lent can file an adversary proceeding. A separate case number is assigned and separate litigation will commence. The creditors who sue debtors usually seek to have their claim deemed nondischargeable which will prevent the debtor from eliminating that specific debt. The litigation can also seek to have the debtor denied a discharge or all debts.
The bankruptcy trustee usually files an adversary proceeding for the purposes of recovering money paid to a creditor just prior to the bankruptcy filing, called a preference payment, or for fraudulent transfer issues. The debtor sometimes files an adversary for violation of the automatic stay. An adversary proceeding can be filed by a creditor, trustee, the debtor, or the U.S. Trustee, meanwhile the bankruptcy case itself is often stalled until the adversary proceeding litigation concludes.
Commencement and the Litigation
The Adversary Proceeding begins when the plaintiff files a complaint. See, Fed. R. Bankr. P. 7003. The complaint is a formal, written pleading in which the plaintiff presents facts and demands relief. There is no specific court form for a complaint. The complaint does usually consist of (1) a caption which identifies the parties and references the bankruptcy case; (2) a narrative statement providing more information on the parties, the description of the transaction, and relationships of the parties; (3) the jurisdiction of the bankruptcy court over the alleged cause of action; (4) the claims that are being made against the debtor; and (5) the relief that is being requested. The relief requested can be monetary or injunctive (requesting the Judge order a party to do or not to do something).
After a complaint is filed with the bankruptcy court, a separate case number is assigned and a summons is generated by the Clerk’s Office and sent to the plaintiff for service. The summons notifies the debtor (or other party) that they have been named as a defendant and the requirement to appear and/or answer the complaint. The plaintiff then serves the summons and complaint. See, Fed. R. Bankr. P. 7004.
After service, the litigation proceeds with a discovery period and eventually a trial if a party doesn’t prevail on a summary motion. In November 2013, the Bankruptcy Court for the District of New Jersey approved a Court-supervised mediation program to facilitate resolution of adversary proceedings. See, D.N.J. LBR 9019. Now, all parties must submit a joint mediation order wherein an agreed upon mediator is selected and non-binding mediation is conducted. The cost of the mediator is split amongst the parties.
Creditor’s Objections to Discharge and Dischargeability
Adversary proceedings filed against the debtor come in two forms, (1) objecting to the dischargeability of a specific debt, or (2) objecting to the debtor receiving a discharge from all debts. If a creditor is seeking a declaration that the debt owed to them is nondischargeable, they would look to the exceptions to discharge as outlined in bankruptcy code. See, 11 U.S.C. §523(a). The exceptions to discharge are outlined in the nineteen subparagraphs of section 523(a). Some common exceptions to discharge that a creditor may assert would include fraud, breach of a fiduciary duty, perpetrating a willful and malicious injury, theft, and embezzlement. Adversary proceedings filed pursuant to section 523(a) can be brought in any chapter of bankruptcy. If a creditor prevails, the debt owed to them would be excepted from the discharge, but the debtor would still receive a discharge as to all of the other debts.
In chapter 7 cases, a creditor may file an adversary proceeding pursuant to section 727(a) of the bankruptcy code to deny a debtor a discharge. If a debtor is denied a discharge, all of their debts will remain, not just the debt owed to the objecting creditor. Usually a creditor, the trustee, or the U.S. Trustee would file an adversary proceeding under section 727 for destroying property of the estate, concealment, improper transfers, lying, not providing information to the trustee, and failure to abide by a court order.
Finally, the bankruptcy code has a provision that could later revoke a debtor’s discharge if information is later discovered that would have prevented the debtor from receiving a discharge in the first place. See, 11 U.S.C. §727(d). The time period for later revoking a debtor’s discharge is limited to the later of one year after the discharge is entered or the date the case is closed. See, 11 U.S.C. §727(e).
When You Need Help with Your New Jersey Bankruptcy
If you are seeking to file or need to defend an adversary proceeding, retaining a competent New Jersey bankruptcy attorney is crucial. Discharge/dischargeability litigation is complex and it is important to make sure your case is handled properly. If you are unsure of your rights, please give us a call for a free consultation. We have office locations in Wayne, Hoboken, Newark, and Hackensack.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.