Chapter 7 – Page 6 – Rochester Bankruptcy and Debt Relief

Repaying Debts After the Bankruptcy

Sometimes I am asked by debtors if they can pay their creditors after they received a bankruptcy discharge. My answer to them is that there is nothing in the bankruptcy law that prohibits debtors from voluntarily paying their creditors, either those creditors that are important to you, or all of them. However, for me as a bankruptcy lawyer, it can be a bit difficult to understand since debtors typically file for bankruptcy protection because they cannot afford to pay their creditors. At the same time, I understand that under some circumstances debtors make a deliberate decision to repay someone.

In many different situations, debtors have creditors that are important to them. Those creditors may be family member who have loaned debtors money. Typically, debtors do not want to discharge the debt owed to close relatives. In those situations, my advice is to list the debt but, once the case is over, repay it voluntarily.

Another usual situation is where the debtor may have credit at a small, local store. Since it may be important for the debtor to have that access to such credit, the debtor may choose to pay that debt even after the bankruptcy case is over and the debt is discharged.

From the creditor’s side, once the bankruptcy is filed, the creditor may not contact the debtor to attempt to “persuade” him to “voluntarily” pay the debt. TIf any creditors does this, it would be viewed by the bankruptcy court as an attempt to collect a discharged debt in violation of the discharge injunction.

If the debtor decides to repay a debt after filing for either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, he should be very careful about making payments on a discharged debt. If a creditor were to sue the debtor on a discharged debt in state court, the debtor could raise the fact that the debt was discharged in bankruptcy by raising it as an affirmative defense in state court litigation or he could remove the action to bankruptcy court and allow the bankruptcy court to enforce its discharge injunction. By making payments on a discharged debt, the debtor could create a “waiver” of the bankruptcy discharge on that particular debt.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Upcoming Changes to New York’s Bankruptcy Exemptions

As readers of this blog know, if a debtor is filing for either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in New York, New York’s bankruptcy exemptions will apply. Unfortunately, those exemptions have not been updated in quite some time and are very limited as far as the values of protected assets is concerned.

There is a bill pending in New York State’s legislature that would substantially change the value of assets that could be protected in bankruptcy by changing the figures included in the Debtor and Creditor Law and CPLR which are the basis of those exemptions.

Specifically, this bill would increase the level of certain exemptions from the satisfaction of a money judgment. In addition to the increases, it would add one computer, one cell phone and one motor vehicle worth up to $4,000 to the list. If such vehicle was equipped for use by a disabled person, the limit would be $10,000. The money judgment exemption for the motor vehicle would not apply if the debt enforced is for child support, spousal support, maintenance or alimony.

It would increase the homestead exemption value of a home under Section 5206 of the CPLR from $50,000 to: $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $75,000 for the remaining counties in the state.

It would also amend Subdivision I of Section 282 of the Debtor and Creditor Law to increase from $2,400 to $4,000 the exemption for one motor vehicle in bankruptcy. If such vehicle was equipped for use by a disabled person, the limit would be $10,000 in bankruptcy. The bill would amend section 283 of the debtor and creditor law to increase the amount of the aggregate individual bankruptcy exemption from $5,000 to $10,000.

The bill would add a new section 285 to the Debtor and Creditor Law to permit debtors to choose either the current federal exemptions or the exemptions in New York Law. The New York State exemptions are listed in Debtor Creditor Law Art 10-A, Sections 282 and 283. Federal exemptions are enumerated in 11 U.S.C. 522(d). It will apply a Cost of Living Adjustment to be published by the New York Banking Department for the applicable exemptions in sections 5205 and 5206 of the CPLR and Section 282 and 283 of the Debtor and Creditor Law.

If those proposed amendments pass into law, the debtors living in Rochester, and Western New York, would be able to protect an additional $25,000 in home equity per filer and also benefit from an increase in the value of vehicle exemption.

More significantly, the debtors will be able to chose between the New York exemptions or the Federal exemption limits. At this time, New York does not allow debtors to make this choice. The ability to utilize federal exemptions will help those debtors who do not own a home more than anything else, because there is a wildcard exemption under Federal Rules. The wildcard exemption, 11 U.S.C. 522(d)(5), typically allows the debtor to exempt a substantial amount of cash, which is presently limited under New York’s exemptions to $2,500.

Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and Immigration Status

Can my bankruptcy filing affect my immigration status? This is a question periodically asked by my clients. The answer to that question is actually depends on the particular circumstances of each case, but here are some of the issues that may be relevant.

There is no immigration law, statute, or regulation that specifically forbids individuals who have filed for bankruptcy from applying for naturalization. Additionally, there is no specific question on Form N-400, Application for Naturalization, related to bankruptcy. However, the debtor’s immigration status can be affected if he has not filed required tax returns or if he owes money to the IRS.

While reviewing immigration-related applications, the INS is usually checking to see if an individual seeking naturalization has evidence of “poor moral character” which could be grounds to deny an application. The filing of a bankruptcy petition as a consequence of financial hardship clearly does not rise to the level of “poor moral character.”

However, if you are facing any type of immigration issue and are about to file for either Chapter 7 or Chapter 13 Bankruptcy, you should disclose that fact to your bankruptcy lawyer at your initial consultation as well as discuss your potential bankruptcy filing with your immigration attorney.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Do Both Spouses Have to File for Bankruptcy Together?

While most married people think that if they file for Chapter 7 bankruptcy or Chapter 13 Bankruptcy, they must do so with their spouse. That is not true.

Whether one spouse or both file a bankruptcy petition, it’s their choice. It is not uncommon for one spouse to have most of the debt in his or her name only, in which case an individual filing would more appropriate. However, if both spouses are have a significant amount of debt, they should file together.

Sometimes I meet with only one spouse because the other spouse is is not willing to file for bankruptcy. In these situations, one spouse to file the bankruptcy petition and obtain necessary relief from the bankruptcy court.

There are also some additional issues that need to be considered. Initially, if only one spouse is filing and the couple is residing together, the other spouse’s income may be relevant for the purpose of household income as reflected on Schedule I, resulting disposable income reflected on Schedule J, and that spouse’s income may also be relevant for the means test.

As far as the means test, it is necessary to determine whether there is a presumption that there is enough disposable income available to give unsecured creditors sufficient payment under a Chapter 13 bankruptcy plan, such that permitting a Chapter 7 could be considered an abuse of discretion. But even if the means test is passed, and no presumption of abuse arises, or, alternatively, if this is a non-consumer bankruptcy and the means test is not even required, abuse can still be found given the totality of the circumstances. The income and assets of the non-filing spouse are important in both those considerations. If the debtor has legal rights to share in the income and assets of a non-filing spouse or even if the practice has been between spouses to share income and assets regardless of legal rights, the bankruptcy law tells us that the debtor’s access to the non-filing spouse’s income and assets has to be considered in deciding whether the bankruptcy court would permitting a Chapter 7 bankruptcy filing.

An experienced bankruptcy attorney can analyze each consumer’s financial situation and suggest whether a married couple should file an individual or a joint petition.

Do Divorce Settlements Survive Bankruptcy?

I have previously written about interplay between divorce, family court proceedings and bankruptcy, as well as other issues involving interplay between bankruptcy and family law. One issue that is highly significant in situations where one of the former spouses is about to file a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy is whether the bankruptcy trusee will seek to undo a divorce settlement agreement.

With bankruptcy filings being so common, and divorce being a major reason for seeking bankruptcy relief, divorce lawyers are frequently concerned as to whether a divorce settlement will be upheld in a bankruptcy proceeding.

There are valid reasons to be cautious since if a debtor transfers a valuable asset to a spouse (or soon-to-be ex-spouse) prior to filing for bankruptcy, and the debtor-spouse does not receive reasonable value in return, then the transfer may be deemed to be a “fraudulent transfer.” In such a case, the bankruptcy trustee can sue the person who received the asset to recover it for the bankruptcy estate, so that all creditors can share in its value. As with any other situations involving fraudulent transfers, the debtor must have been insolvent at the time of transfer.

In order to demonstrate that a transfer was not a fraudulent transfer, the party who received the transfer would have to show that there was “reasonably equivalent value.” It is common for a divorcing spouse to settle the divorce case by giving the other spouse valuable assets such as an interest in real estate, bank accounts, investments, or other personal property. In those situations, both parties do not want a bankruptcy trustee to try to set such transfers aside.

There was a time when some of the bankruptcy courts have held that innocent spouses who received such a transfer were no different from any other party who received a large transfer without sufficient consideration. However, a case decided by the United States Circuit Court of Appeals in June of 2009 will give many divorcing spouses a greater degree of certainty that a trustee will not be able to set aside a divorce settlement.

The decision in Bledsoe v. Bledsoe, 569 F.3d 1106 (9th Cir. 2009) this issue by addressing when a bankruptcy court may avoid a transfer made pursuant to a state-court divorce decree. The Circuit Court affirmed that decision and held that a trustee can only set aside a matrimonial settlement if he alleges and proves “extrinsic fraud.” The Court also held that a divorce decree that follows from a regularly conducted, contested divorce proceeding conclusively establishes “reasonably equivalent value” in the absence of fraud or collusion. Since the Second Circuit has not addressed this issue, Bledsoe is valid law in the bankruptcy courts in New York. At the same time, the bankruptcy court, here in Rochester, New York, and elsewhere, will always review the totality of the facts.

In order for a divorce settlement to be upheld by the bankruptcy court, it must be ratified by the matrimonial court. That means that any transfer should be accurately described in a stipulation of settlement. In addition, the stipulation must be specifically referred to and incorporated in the judgment of divorce. It is not enough that the parties merely stipulate to a settlement; the court must specifically approve the settlement. In a typical judgment of divorce, this is accomplished by stating that the stipulation survives the judgment of divorce and is not merged into it.

Can You Be Fired For Filing Bankruptcy?

Many people who file for bankruptcy in New York have fears about their relatives, friends, neighbors and employers discovering that they have filed for bankruptcy. They try to hide this fact from everyone. Many people who would greatly benefit from filing for bankruptcy under either Chapter 7 or Chapter 13 are reluctant to do so is because the perception among some people is that it is shameful to file for bankruptcy. I spend a considerable amount of time explaining to my clients that there is nothing shameful about filing for bankruptcy.

A lot of people are scared that their employers would find out that they filed for bankruptcy. They are afraid that their employers might fire them from their jobs if employers find out about their bankruptcy filing. They try as much as possible to hide their filing for bankruptcy because of this sense of insecurity.

The debtors should not be concerned since federal law prohibits employers from discriminating against them or from terminating their employment solely because of the debtor’s bankruptcy filing. Specifically, the bankruptcy code’s non-discrimination provision, 11 U.S.C. section 525(b), states as follows:

No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title … solely because such debtor … is or has been a debtor under this title…. 11 U.S.C. sec. 525(b).

One caveat to the above provision is that the Bankruptcy Code prohibits discrimination solely on the basis of the bankruptcy filing. It will not protect an employee who is having other employment-related problems.

The reality now is that a great number of people in Rochester, New York, or elsewhere in Western New York, have filed or are filing for bankruptcy. For a business having employees who file for bankruptcy is simply a fact of life. In many respects, it is better for the employer to have an employee file for bankruptcy, so that the employee is not spending time answering phone calls from the debt collectors, or that employer does not have to waste time garnishing employer’s wages. In today’s economy, bankruptcy is a reality that everyone is facing, and so companies would rather not do anything that would appear to be a form of discrimination against their employees.

Should You Hire a Bankruptcy Lawyer?

Some of the major reasons why people who know they need to file for bankruptcy, but postpone doing so, is fears about filing either Chapter 7 or Chapter 13 Bankruptcy, and concern about paying the legal fees.

Some debtors consider filing bankruptcy on their own. However, this can be a major mistake and can create additional problems. As I have written about previously, bankruptcy involves a number of procedural and substantive steps and tests that have to be satisfied before the bankruptcy court can grant a discharge.

In both Chapter 7 and Chapter 13 bankruptcy cases, the debtor must appear before a court-appointed trustee for a 341 hearing. The bankruptcy trustee who conducts the hearing is not someone who is there to help the debtor. His role is just the opposite. The trustee is charged with investigating the debtor and his financial circumstances to determine if there are any assets available for thee benefit of creditors. Meeting with an experienced bankruptcy attorney will enable the debtor to have his or her financial situation reviewed and assets protected in advance to the extent possible.

What debtors may not realize is that certain types of financial transactions that may have taken place years before filing can have a major impact on the debtor’s bankruptcy. For example, if any significant assets were given away or if real estate was transferred, this may amount to what is known as a fraudulent conveyance or a preference, and may result in significant litigation in the bankruptcy case. Usually, a bankruptcy lawyer will review these issues before a bankruptcy petition is filed in order to mitigate the risk.

While the bankruptcy petition is written in plain English, it is a difficult document to prepare for someone who is not familiar with the Bankruptcy Code. A complete petition in a Chapter 7 Bankruptcy in New York, including all of the various forms and schedules runs in excess of 40 pages. The petition requires preparing numerous schedules and budgets. The debtor must list appropriate information about his debts, assets, income and expenses.

The Statement of Financial Affairs includes numerous questions that must be answered. All of the debtor’s creditors must be listed not only in a schedule of debts (segregated in three separate categories) but also in a special format called a Matrix. Such listing must include creditors’ names, addresses, account numbers, dates when any debts were incurred and their purpose.

When Congress passed BAPCPA in 2005, it imposed many new requirements. The most significant of those requirements is a complex and complicated means test, as well as the requirement for mandatory credit counseling. The Chapter 7 trustee as well as the Office of the U.S. Trustee reviews each and every petition to make sure all of the requirements under the new law are properly met. The means test is complicated, and the debtor’s failure to properly prepare the bankruptcy means test can create significant problems as the United States Trustee can seek to have the bankruptcy case dismissed.

The debtor must also choose which Chapter of bankruptcy to file. If a debtor is seeking to stop foreclosure and cure mortgage arrears, a Chapter 7 Bankruptcy filing won’t be helpful. At the same time, a Chapter 13 Bankruptcy filing is likely to result in a 3-5 years payment plan.

There are self-help books that explain how a debtor can prepare and file his petition and complete the process. However, there are many traps for the unwary that even attorneys who do not regularly practice bankruptcy often create problems for their clients.

Every bankruptcy trustee I know in Rochester, New York, has expressed concern about those debtors who file bankruptcy without an attorney because these debtors often make serious procedural and substantive mistakes. Self-representation by pro-se debtors in bankruptcy matters can end up being a mistake, and result in further financial problems for the debtor.

Means Test – Inclusions and Exclusions

In a typical Chapter 7 Bankruptcy, the most significant hurdle that the debtor has to overcome is the means test.

The 2005 amendments to the bankruptcy code created a new Means Test. The main purpose of this test is to a) determine if an individual is eligible to file a Chapter 7 Bankruptcy and b) to determine the disposable income of a Chapter 13 debtor who is above the median income.

In order to determine eligibility to file Chapter 7 Bankruptcy, the means test is calculated by entering the debtor’s income figures for the prior six months into form B22 of the bankruptcy petition. If the debtor is below median income, no further steps need be taken and the debtor is presumed to be able to file Chapter 7.

If the debtor is above median income, further sections of form B22 must be filled out. The debtor’s estimated monthly income (based on the prior 6 months) is calculated and deductions are made using both IRS standards (for most living expenses) and some of the debtor’s actual expenses (including secured debt payments and health expenses).

If, after these deductions, it is determined that the debtor has minimal or no monthly disposable income, the means test is satisfied and the debtor is presumed eligible to file Chapter 7 Bankruptcy. If the debtor fails the means test, he or she is presumed ineligible to file Chapter 7, and absent special circumstances warranting an exception, must seek relief under another chapter of the code, typically, Chapter 13 Bankruptcy.

In order to determine disposable income in a Chapter 13 case, the Means Test is conducted much the same way as in a Chapter 7 case. If the debtor is below median income, the remaining sections if form B22 need not be filled out and the debtor’s disposable income will be based on his or her actual income and expenses at the time the petition is filed. If the debtor is above-median income, the remaining steps of the means test are performed and disposable income is the figure reached through the above-described means test calculation. In many instances the figure yielded by the means test will be close to what the debtor pays every month over the life of the Chapter 13 plan.

What is also critical is what income is included within the definition of income. Initially, the spouse’s income may be included, even if the spouse is not filing bankruptcy. If you are receiving support in your household from your spouse, then you’re supposed to have that income available for your creditors even if you don’t earn actually that income.

Another issue which comes up fairly often is income received from sources other than work. Some sources of “other income” could include: interest, dividends, pension income, bonus payments, child support, alimony or maintenance payments, disability payments under workers compensation or private insurance. Some other sources of income to the family which may or may not be income include: withdrawals from IRA and 401k plan, income tax refunds.

Some sources of revenue are not income for purposes of the means test: social security payments received by the filer or his/her spouse, unemployment benefits, certain types of income received by the members of the National Guard or Armed Forces Reserve.

Social Security income: Means testing does not consider social security as income. Accordingly, someone with $2,000.00 per month social security income will pass the means test even if expenses are only $1,000 and $1,000 is left over to pay creditors on the means test. Social Security Income includes both Social Security Disability (“SSD”) as well as Supplemental Security Income (“SSI”) payments. Social Security income may be received by children in the household as survivor benefits in a situation where one of the parents has died. Despite the fact that those benefits can be substantial, U.S. Trustee’s Office advises that that survivor benefits income is not to be included in the means test, despite the fact that, in most situations, such income is used to pay household expenses.

The National Guard and Reservists Relief Debt Act of 2008 applies to certain members of the National Guard and reserve components of the Armed Forces. If you are a member of the National Guard Member or Armed Forces Reserve, then you will be temporarily excluded from the means test for entire time you are on active duty and 540 days thereafter, provided you serve at least 90 days. If your duty is less than 90 days, you do not qualify. If you are active member of the active duty military, you do not qualify.

Another important exception applies to the situations where the debtor has primarily non-consumer debt. If the debtor’s debt is primarily non-consumer debt, then means test does not apply. Accordingly, someone making $10,000 per month with primarily business debts, still qualifies for Chapter 7 relief and discharge.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy and Repayment of Debts Owed to Relatives

Occasionally there is a need to borrow money from relatives. Regardless of the size of the loan, the obligation to repay the debt to a family member is usually pretty powerful. Most people try to repay those debts first, before paying their other creditors. However, if you are experiencing financial problems, repaying your relatives prior to filing bankruptcy is not a good idea. As discussed below, any such loans can be repaid, but they should be repaid after the bankruptcy is filed.

The reason that the debtor should not repay debts owed to relatives prior to the filing is because of the “insider” problem. Your relatives, especially close ones, are considered to be “insiders” under the Bankruptcy Code’s definition of an insider, which includes a “relative of the debtor.” 11 U.S.C. § 101(31).

Because they are related to you, any payments to insiders within the applicable period are treated as preferences. The Bankruptcy Code states that a “preference” occurs when:

the debtor transfers something “to or for the benefit of a creditor;”
for a debt “owed by the debtor before [the] transfer was made;”
“made while the debtor was insolvent” (that is, the debtor’s debts were greater than his assets);
made within 90 days of bankruptcy, or, if an insider receives the transfer, within one year of bankruptcy; and
and the transfer “enables [the] creditor to receive more than [the] creditor would have received” (1) in a Chapter 7 case, (2) than “if the transfer had not been made,” and (3) “the creditor received payment of such debt to the extent provided in the [Bankruptcy Code].”

Generally, according to the Bankruptcy Code, creditors of the same type, called “class” should be treated the same. Because of this, the Bankruptcy Code looks back anywhere from 90 days to one year for preferential transfers or “preferences.” The Code presumes, not incorrectly, that a debtor would rather pay a relative rather than other creditors like credit card issuers.

As a result, the bankruptcy trustee will examine any debts repaid during the preference period. If the trustee believes a preference occurred and there are no defenses, the trustee can sue the person or entity who received the payments.

Because of these rules, you should hold making payments to the relatives prior to the filing. You can always pay back those debts after your bankruptcy case is over.

If you’ve already paid your relatives back during the one-year preference period, there are some solutions. First, if the payments are under $600, the trustee can’t sue your relative for the payments, since the preference falls within the “small preference” exception. Also, if the payments are $600 or more, but not that much–say not more than $1,000, the trustee still might decide not to bother with the transfer since the cost of recovery and administrative costs would reduce the benefit to the bankruptcy estate. Trustees don’t like administering bankruptcy estates where the asset values don’t justify the cost and effort of administration.

Another defense is that those payments may be “ordinary course” payments. In other words, it may be normal in both the relative’s financial affairs and the debtor’s for borrow and repay money, and the money was paid back in accordance with agreed upon terms. This is called the “ordinary course of business” defense.

The third available defense is that the relative gave “new value” in exchange for the payment. For example, the relative made another loan or gave you something else of value in return.

Fourth approach to addressing this problem, if the preference occurred close to a year prior to the time in which you plan on filing your bankruptcy, you can simply wait out the year.

Finally, the transfer can be undone by having the relative refund the money. Unfortunately, this may create another problem which relates to the availability of cash exemption in the bankruptcy filing. If you can exempt the refunded money, you may repay the debt after your case is over.

Adversary Proceedings In Bankruptcy

For most part, filing either Chapter 7 Bankruptcy or Chapter 13 bankruptcy is an administrative process. The bankruptcy lawyer gathers information, prepares and files the petition. In Chapter 7 bankruptcy, the debtor attends a brief hearing conducted by a trustee. In Chapter 13 Bankruptcy, the debtor also has to attend a confirmation hearing. However, in some cases an “adversary proceeding” is filed.

An adversary proceeding is essentially a case within a case. It is a lawsuit within either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy case about an issue related to the bankruptcy case. There are many other situations in which adversary proceedings arise. In other instances, the debtor brings the adversary proceeding to bring a claim or to obtain a determination from the court. The Bankruptcy Rules of Procedure specify the situations in which parties must file adversary proceedings.

There are three parties in the bankruptcy court case who can file an adversary proceeding. Those parties are the creditor, the trustee (either the Chapter 7 Bankruptcy trustee, Chapter 13 bankruptcy Trustee, or the United States Trustee), and the debtor. Each adversarial proceeding is heard by the United States Bankruptcy Judge for the district where the bankruptcy is filed. For the cases filed here in Rochester, the adversary proceeding cases are heard by Hon. John C. Ninfo, II.

When a creditor files an adversary proceeding, it is usually because the creditor is claiming that the debt owed to the creditor should not be discharged in the bankruptcy. Usually the creditor will argues that it is only that particular creditor’s claim that should not be discharged since it falls within one of the exceptions to discharge, such as a debt created through fraud, willful or malicious injury, or a personal injury caused by drunk driving. Alternatively, the creditor may argue that the filing of the bankruptcy case was done in bad faith and the debtor is not entitled to the discharge altogether. These kinds of adversary proceedings are not common.

Another kind of adversary proceeding is filed by the Chapter 7 Trustee, Chapter 13 Trustee, or the United States Trustee. A trustee may argue that the schedules were not filled out accurately and were intentionally fraudulent. A trustee may file a motion to dismiss the bankruptcy case if paperwork is not filed timely, improperly, or if the debtor misses a court date without a good reason. A trustee may file an adversary proceeding seeking to collect money back from a creditor who received funds or property from a debtor. A trustee may also file an adversary proceeding to reverse a transfer of real property. The United States Trustee may file an adversarial proceeding to force the debtor to move from Chapter 7 Bankruptcy to Chapter 13 bankruptcy, if the U.S. Trustee believes that the filing of the bankruptcy petition was done in bad faith. The U.S. Trustee may also file an adversary proceeding to dismiss the case, if the U.S. Trustee believes the filing of any bankruptcy petition was done to abuse the bankruptcy system.

Finally, a debtor may file an adversary proceeding against a creditor. The debtor may recover damages for a creditor’s actions taken in violation of the U.S. Bankruptcy Code, or violated the automatic stay, or the discharge (such as contacting the debtor after the bankruptcy is completed).

Mere fact that an adversary proceeding is filed does not mean that the party filing it will prevail. The bankruptcy judge will hear the case and will determine each party’s rights. It is the job of the bankruptcy attorney to advise the party as to the likelihood of success in an adversary proceeding, but the case will be decided by the bankruptcy judge .

The following is an example of a situation where an adversary proceeding is filed. The debtor obtained a large cash advance prior to filing. That cash advance was used to prevent a foreclosure or recover a vehicle after a repossession. However, the credit card issuer is likely to object claiming that the cash advance taken out only a few months prior to filing bankruptcy and argue that the debt is nondischargeable since it was either fraudulent or the money was borrowed in anticipation of the bankruptcy filing.

The litigation would commence with a filing or a complaint. An answer would serve, and the parties would engage in discovery. If the parties were unable to resolve their dispute during pretrial proceedings, there would be a trial.