In the United States, an adversary proceeding is a procedural device used for determining the distribution of the assets of a debtor in bankruptcy. Adversary proceedings are lawsuits brought by interested parties in the bankruptcy process, and are initiated by the filing of a formal complaint with the bankruptcy court. These proceedings are governed by the Federal Rules of Bankruptcy Procedure.
The adversary complaint is served on the individual who is the subject of the proceeding. After the individual who is served with the adversary complaint files an answer, the bankruptcy court schedules a hearing before a judge, who then settles the matter in dispute. Often an adversary proceeding is used to resolve competing claims between a debtor’s various creditors. A complaint in a bankruptcy case can be filed by either the debtor, the creditors of the debtor, or the bankruptcy trustee.
Creditors may file an adversary proceeding to determine the dischargeability of a debt. Usually a creditor who files a complaint against a debtor objects to the discharge of the debt owed, on the grounds that it falls within one of the exceptions to discharge provisions of the Bankruptcy Code. One exception example would be if the debt was incurred through fraud. Creditors may also file an adversary proceeding to determine the validity of any liens, as well as to establish the priority of their claims as secured creditors.
A bankruptcy trustee, who is charged with marshalling all of the available assets of the debtor for distribution to creditors, may have cause to file an adversary proceeding against a debtor. The trustee may object to the manner in which the debtor completed his schedules of assets and liabilities, either because they were incomplete or inaccurate, or were intentionally fraudulent. A trustee may also seek to have a debtor’s bankruptcy case moved from a Chapter 7 case to a Chapter 13 reorganization plan, if it appears the debtor has the financial ability to make a partial payment, over time, to some of his creditors.
When creditors are notified that a debtor has filed for bankruptcy protection, all collection activity is automatically stayed, pending the determination of the case. A debtor may file an adversary proceeding against some of his creditors for a violation of this court order. Once the debtor receives an official discharge from the bankruptcy court, former creditors are prohibited from attempting to collect on debts.