Adversary Proceedings by the Debtor

 Posted on March 08, 2017 in Bankruptcy Procedure

Sometimes it’s in your best interest to force an issue in bankruptcy court by, in effect, suing a creditor in an adversary proceeding.

The last two blog posts have been about you as a debtor being hit by an adversary proceeding. A creditor may try to use that tool to prevent you from legally writing off a debt. A Chapter 7 or Chapter 13 trustee may try to kick you out of bankruptcy altogether if you don’t follow the rules. Even though these situations are relatively rare, you still want to get advice so that you can avoid them.

However, you can also use an adversary proceeding as a tool to benefit you in certain circumstances. You have some significant practical advantages in bankruptcy court that you would not have in normal state court.

The Advantage of a Limited Issue

The disputes that you can and would want to raise are specific, limited ones. Issues like whether you can discharge—legally write off—a debt. Or whether a creditor violated bankruptcy law and has to pay you damages.

When you have a focused issue such as these, your cost for resolving the dispute are less.

For example, take the issue of whether you can discharge a debt. Most debts are clearly either discharged in bankruptcy or they are not. If you owe some spousal support, that can’t be discharged. There’s nothing to dispute.

But sometimes it’s not so clear. What if you were obligated to sign over a vehicle to your spouse, and there is some indication that your spousal support was reduced for the first year as a result? You haven’t yet signed over the vehicle. Now you are filing a Chapter 13 case which allows you to discharge divorce property settlements. You want to keep the vehicle for yourself. Is the divorce obligation to sign over the vehicle a spousal support obligation or a property settlement one?

The bankruptcy court gets to decide. The issue is a narrow one: is that obligation “in the nature of support” or not for bankruptcy purposes? The divorce court has already determined that divorce law says your spouse gets the vehicle. This is a debt you owe—everybody accepts that. Now the issue is simply whether or not it is a debt that bankruptcy law makes dischargeable. Again, under all of the facts, is it “in the nature of support”? The entire dispute focuses on that single issue, making court resolution of that relatively straightforward and quick.

The Advantage of an Efficient Court

The bankruptcy disputes are resolved quickly because of some practical aspect of bankruptcy litigation.

First, it’s a federal court so resources tend not to be stretched as thin as in many state courts. Often state courts cases move incredibly slowly simply because there are not enough judges to go around.

Second, bankruptcy courts do nothing but bankruptcy. State courts have to deal with a huge range of criminal and civil matters. For constitutional reasons, the criminal cases often take precedence on the court’s calendar. On the civil side, theses courts deal with absolutely everything from apartment evictions to mega-million dollar business disputes. In bankruptcy court the issues are comparatively very limited. So systems have been established to deal with them efficiently. And the bankruptcy judges are essentially experts at these issues and can resolve them relatively speedily. So you get your dispute resolved fast, significantly reducing everybody’s costs.

The Advantage of a Lawyer Already in Your Corner

One of the biggest challenges when you are considering whether to bring a lawsuit is finding a good lawyer to represent you. It’s certainly one of the biggest practical problems if money is tight.

But when you are filing any kind of bankruptcy case, virtually always you’d have retained a lawyer for that purpose. You’ve presumably built up a trusting relationship. You’re likely being hugely benefitted financially from the debts you are discharging. So when you’re confronted with the question whether you should sue a creditor (by filing an adversary proceeding against it), you have a lawyer at your side to advise you about it. He or she is already familiar with your situation. The lawyer is very likely also very familiar with the focused legal issue at hand.

Conclusion

So resolving a dispute in bankruptcy court is to your advantage because you have your lawyer at the ready, an efficient and quick court, and narrow issues to resolve. What are those relatively narrow issues that may make suing a creditor in bankruptcy worthwhile? We’ll discuss them in our next blog a couple days from now.