Adversary Cases in Bankruptcy
The bankruptcy code describes categories of debts that are excepted from discharge in a bankruptcy case. For most of these debts, the exception to discharge applies automatically. In other cases, the creditor must file a lawsuit (called an adversarial action or adversary case) with the bankruptcy court and have the judge determine whether the debt will excepted from the discharge order. A debtor may also want the bankruptcy judge to determine whether a debt is excepted from discharge.
Debts described in sections 523(a)(2), (4) and(6) (debts incurred by fraud or malicious conduct) are not automatically excepted from discharge. A creditor or debtor must file an adversary case requesting the bankruptcy court to determine the discharge status of these types of debts. The adversary case is generally filed within 60 days after the first 341 Meeting of Creditors. Failure to file a timely adversary case waives the right to challenge the dischargeability of the debt.
In some rare cases a creditor or the bankruptcy trustee may ask the bankruptcy court to deny the debtor a discharge. Hiding assets, lying during the bankruptcy process, failing to obey a court order, and destroying documents with the intent to defraud creditors are all actions that could result in the bankruptcy court denying the debtor a discharge. In bankruptcy, honesty is not only the best policy, it is the only policy that will get you a discharge.
If an adversary case is filed against you, do not panic. You and your bankruptcy attorney must be served notice of the adversary case and you will have time to answer the complaint. In most cases an experienced bankruptcy attorney will anticipate the adversary case and will discuss options with the client. However, some cases come “out of the blue.” In those cases there is still time to develop a strategy including negotiating a settlement with the creditor.