What Does A Notice Of An Adversary Proceeding Mean For Your Bankruptcy?

Everything seemed to be going fine with your bankruptcy until you received a notice that there was an adversary proceeding against you. What does this mean? Will it stop your bankruptcy from proceeding altogether?

Who filed the adversary proceeding?

Adversary proceedings are lawsuits related to your bankruptcy, but separate. Anyone involved in the bankruptcy can file an adversary proceeding, even you. However, since the adversary proceeding was filed against you, it is either one of your creditors or the bankruptcy trustee that's filed it.

Most people are unaware that the trustee isn't the final authority in their bankruptcy case -- a judge is. When an adversary proceeding is filed, it requires the authority of the judge to settle the matter. They are more formal than just contesting an action within the bankruptcy itself.

Is a creditor contesting your discharge?

There are at least 18 different types of debts that you can't discharge in bankruptcy, including things like spousal and child support. For the most part, however, you should already be aware if any of those apply to your case. Usually, a surprise adversary proceeding from a creditor has one basic complaint: fraud on your part.

A creditor may allege that you obtained credit from them through fraud. For example, you put down on a credit application 6 weeks after losing your job that you still had an income of $75,000 a year, rationalizing with yourself that it was technically true -- the year before, anyhow.

Another possible scenario is that a creditor is alleging that you ran your debt with them up while knowing that you didn't have the ability to repay. You may run into this problem if you made a lot of small charges on a credit card in the 90 days before you filed but stayed below the $650 limit that would automatically exclude them from discharge and trigger a presumption of fraud.

Hopefully, you'll be able to explain what happened to the satisfaction of the court. Maybe you took out the credit while you celebrating your first big contract as an independent consultant and fully expected your income to be as high or higher than you listed on your credit application. It's entirely possible that all those small charges were for necessities, like food and gas. Discuss the situation with your attorney so that you can determine how the court is likely to react to your explanation and decide whether or not you want to fight the proceeding.

Is the trustee filing an adversary proceeding?

This should concern you more than a creditor's adversary proceeding because a trustee is unlikely to take this step unless he or she has serious qualms about your case.

If you've put the trustee on edge because you're late with paperwork or haven't had it filled out properly, get things in order and get to your attorney's office. Your attorney can help you try to fix the situation before your bankruptcy ends up dismissed.

If the trustee is questioning your honesty and suspects that you are hiding assets or lying about your income, it's time to be very transparent about anything and everything. Full disclosure is often the best defense against suspicion of fraud. Talk to your attorney about the situation and make sure that he or she knows absolutely everything that's gone on with your finances for the last several years.

An adversary proceeding is definitely a sign of troubled waters ahead, but it doesn't have to sink your bankruptcy case altogether. A prompt, open response on your part can often make a big difference when it comes to the judge's decision on the matter. Keep in mind that bankruptcy is designed to forgive the honest debtor's financial mistakes -- so a truthful response is always best.

Contact legal professionals like Gruber & Associates, PC to learn more.