Adversary Proceedings by the Trustee

 Posted on March 06, 2017 in Bankruptcy Procedure

Usually it’s not hard to avoid getting into a dispute with your trustee. But you need to know the law and follow it.

Last time we introduced the term “adversary proceedings,” essentially the name for lawsuits in bankruptcy court. We focused on adversary proceedings brought by creditors against debtors when challenging the discharge of their debts. Today we turn to possible adversary proceedings by trustees.

We have to keep emphasizing that most consumer bankruptcy cases involve NO adversary proceeding at all. Most cases go generally as expected, that is, assuming that the debtor is represented by an experienced bankruptcy lawyer. This also assumes that the debtor is honest and thorough with the lawyer so that any potential issues can be nipped in the bud.

But disputes sometimes do arise. So it’s helpful to have some idea what those might be and how they are resolved.

The Trustee in Bankruptcy

Essentially, the trustee in a Chapter 7 or Chapter 13 bankruptcy stands in for the creditors. He or she is a person given certain powers by the bankruptcy court to act on behalf of the creditors. The practical idea is that it’s simply not very efficient for every creditor to deal with the debtor directly. Once a person has to file bankruptcy, there’s usually not much in assets to fight about. Also, the debtor is protected from creditors, but still has to follow the laws of bankruptcy. So the trustee is empowered in certain ways to enforce those laws.

One way bankruptcy trustees enforce bankruptcy laws is through adversary proceedings against the debtor.

Trustee-Filed Adversary Proceedings

Here’s a list of the main kinds of adversary proceedings a bankruptcy trustee could bring:

• raising a concern that the debtor did not complete the bankruptcy documents accurately but rather intentionally misrepresented the facts (see Section 521 of the U. S. Bankruptcy Code.)
• asking for the bankruptcy court to dismiss the case if paperwork is not filed on time
• asking for case dismissal if the debtor misses a court date without a good reason
• getting court authority to collect money back from a creditor who received funds or property from a debtor (see Section 547)
• undoing a transfer of real property or other assets that the debtor gave away or sold before filing bankruptcy (see Section 548)

We’ll talk about these more in upcoming blog posts.

The United States Trustee

There is another player in the bankruptcy system which can also bring adversary proceedings, the U.S. Trustee. Unlike the “chapter trustees” above, this is an office of the federal government. It has some major administrative and enforcement roles in the bankruptcy system. The U.S. Trustee’s office supervises the “chapter trustees” and directly oversees bankruptcy cases as well.

The U.S. Trustee mostly files adversary proceedings for two reasons:

• to force the debtor to move from Chapter 7 to Chapter 13 if the U.S. Trustee believes that the filing of the bankruptcy petition was done in “bad faith”
• to dismiss the case if the U.S. Trustee believes the filing of any bankruptcy petition was done to “abuse” the bankruptcy system

We’ll talk about these more in upcoming blog posts.

Conclusion

We realize that hearing about these various ways that the Chapter 7 and 13 trustees and the U.S. Trustee can bring adversary proceedings against you can be unsettling. But most of the time it’s not hard to avoid these kinds of disputes. When driving down the freeway we don’t have to worry about the highway patrol if you’re not speeding. But it is important to know the speed limit and stay below it.

In bankruptcy it’s crucial to know the law by having a lawyer in your corner explaining it to you. That way you can avoid disputes from arising. And in the relatively rare times when a dispute does happen, you have the necessary help to resolve it quickly.