An Adversary Proceeding or “AP” as it is often called is basically a lawsuit filed within a bankruptcy case. An AP can be filed by the Trustee, the Debtor or Creditor. To file an Adversary Proceeding, a formal complaint must be filed with the court and served on the Defendant. The complaint will set forth all relevant facts and the relief requested and must be defended or a Default Judgment may be rendered.
Reasons to File an Adversary Proceeding
The reasons a Trustee, Debtor or Creditor will file an AP are usually vastly different.
Creditors Adversary Proceeding
Creditors usually file an AP to try to avoid having their debt discharged by the Bankruptcy proceeding. To achieve this goal of having their debt declared non-dischargeable, they will allege that you committed some sort of fraud to induce them to loan you their money or their loan falls within one of the Exceptions to discharge. They will often try to prove that you knew you were going to file Bankruptcy when you took out your loan with them.
If you file Bankruptcy within 70 days of taking out cash advances that in aggregate total more than $925.00 or file within 90 days of purchasing luxury goods or services that in aggregate total more than $650.00 then there is a presumption that the debt is non-dischargeable and thus a good chance they will succeed in winning their AP. However, if the amount the creditor is seeking to avoid is not very high or you have exigent circumstances the creditor is not aware of, all is not lost and you may be able to negotiate with them and settle outside of court, thus discharging some, most or even all of the debt.
Trustee Adversary Proceeding
The Trustee can file an AP to ask the court to deny your bankruptcy discharge. If they can prove you lied on your bankruptcy papers, hid assets, or otherwise tried to abuse the bankruptcy system, the trustee can argue that you should not be entitled to the benefit of a discharge. The trustee can also file an adversary proceeding against your creditors to recover money you paid to them within 90 days of your Bankruptcy filing or to between 90 days and 1 year to a creditor that is determined to be an insider, such as a relative. This AP is to prevent preferential payments and fraudulent transfers to creditors or relatives.
Debtor Adversary Proceeding
The Debtor usually files an AP to seek money damages from creditors violating the automatic stay. This is when the creditor contacts the Debtor to recover money on their debt by phone call or written communication without first obtaining permission from the Court, Debtor or Debtor’s Attorney.
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