What is an Adversary Proceeding?
By definition, an Adversary Proceeding is a lawsuit filed within the bankruptcy case. Only three parties can file the complaint that initiates an Adversary Proceeding; these parties include the creditor, the trustee and the debtor. When an Adversary Proceeding is filed, the parties must go in front of the Judge and explain their case.
When a creditor files an Adversary Proceeding, it is usually because the creditor is fearful that their particular debt is being wrongfully discharged in the underlying bankruptcy case. However, there are certain categories of debts that are declared non-dischargeable. The non-dischargeable debts include certain taxes, past due child support, student loans, damages arising from drunken driving accidents, and, depending on the circumstances, credit cards and personal loans may be non-dischargeable as well. These debts make up the main cause of Adversary Proceedings. By filing a lawsuit, the creditor is hopeful that they the debt will be declared non-dischargeable and essentially survive the underlying bankruptcy case.
The Bankruptcy Case Trustee, or the United States Trustee, can also file an Adversary Proceeding against the parties to the Bankruptcy case. For instance, the Trustee may file an Adversary Proceeding against a creditor to collect money if the creditor has received funds or assets from the debtor prior to the Bankruptcy that would be considered a preferential payment. On the other hand, the trustee may file against a debtor if paperwork was not filled out correctly or on time, if a court date was missed or if schedules were intentionally filled out incorrectly. Last, the debtor is able to file an Adversary Proceeding. For example, the debtor can bring suit against a creditor if the creditor has violated the automatic stay or discharge injunction.
The judge will take into account each side of the adversary proceeding and will determine the outcome through a hearing or a trial. Essentially, an Adversary Proceeding is a separate lawsuit filed within the Bankruptcy Court related to the underlying Bankruptcy Case.