Can a lender initiate adversary proceedings in your bankruptcy?

 People with substantial debt and complex financial situations may file for bankruptcy in order to stop collection activity with the automatic stay or to discharge certain debts. Most unsecured debts are eligible for discharge in standard bankruptcy proceedings.

However, lenders and creditors can sometimes push back against an attempt to discharge a debt in bankruptcy. If a lender initiates adversary proceedings, they hope to convince the courts that the debt you owe them should not be part of your discharge.

Other times, the person seeking a discharge may initiate adversary proceedings to prove that a specific debt, like a student loan, should be part of their discharge. A trustee can also initiate these proceedings in some circumstances. Adversary proceedings can quickly complicate a standard bankruptcy filing.

What happens at an adversary proceeding?

The primary objectives of an adversary proceeding are to determine whether a specific debt is eligible for discharge, to stop a violation of an automatic stay, to challenge the bankruptcy discharge in general or to address potentially fraudulent transfers immediately prior to or during bankruptcy. Sometimes people also start them to recover funds paid to a creditor right before a bankruptcy filing.

The courts will look closely at financial records, contracts and other evidence in adversary proceedings. In some cases, they may allow a creditor to continue collection activity on a debt by lifting the automatic stay and exempting the debt from discharge. In cases where someone engages in fraudulent transfers to manipulate the bankruptcy process or has otherwise misrepresented facts to qualify, the courts might agree with a plaintiff claiming that the discharge of all debts should not occur.

The outcome of adversary proceedings will have a direct impact on the bankruptcy and how much relief it provides the person filing for bankruptcy. An experienced attorney can help you.