An automatic stay, which is unique to bankruptcy, generally gives breathing room to a debtor who has filed a bankruptcy.  Meaning, if there was pending litigation or attempts to collect an outstanding obligation, the majority of those actions must cease subject to a further Bankruptcy Court order that removes the automatic stay.  In a previous blog post, “Will the ‘Return to Normalcy’ Increase Tenants Seeking Bankruptcy Relief?” we broadly discussed the automatic stay and debts that are either dischargeable versus non-dischargeable, but does filing for bankruptcy eliminate the chances of litigation after the bankruptcy relief?  The short answer is: it is not a guarantee.

An Adversary proceeding (“Adversary”) is a separate lawsuit filed with the Bankruptcy Court.  Similar to lawsuits that are filed outside of the Bankruptcy Court, an Adversary will have a Plaintiff and Defendant.  Many times the Plaintiff of an Adversary is a creditor pursuing an exception to its debt from being discharged.  However, there are other circumstances in which an Adversary may be commenced.  For example, a trustee may file an Adversary seeking to recover (or avoid) pre-bankruptcy transfers, or a debtor may file an Adversary seeking the turnover of payments the debtor was entitled to as of the date it filed for bankruptcy.

The nature of the claims alleged against a debtor prior to filing for bankruptcy may give insight as to whether similar claims will be pursued in the Bankruptcy Court.  The relief provided under the Bankruptcy Code to have debts discharged is premised on the “honest but unfortunate debtor,” also known as the “fresh start.”  Therefore, if the pre-bankruptcy allegations are derived on the basis of fraud or conversion, then it is more likely that the creditor (or claimant) that was pursuing those claims will continue to do the same in the Bankruptcy Court.  The ultimate goal being that the obligation due and owing to the creditor is excepted from discharge.  Stated differently, if the Adversary challenging the discharge is successful, the debtor will still be liable to the creditor for the outstanding monetary obligations after the bankruptcy is closed.  Whereas the creditors with dischargeable debts are enjoined (or barred) from pursuing collection after the bankruptcy is closed.

With a few exceptions, if a creditor is notified of the bankruptcy, the time in which that creditor may pursue an Adversary seeking an exception to discharge starts to run.  In most instances, a creditor has 60 days from the first scheduled Meeting of Creditors to file an Adversary pursuing an exception to discharge.  A common misunderstanding is that a creditor has 60 days from when the Meeting of Creditors is conducted, but that is not the case.

If a creditor does file an Adversary, as noted above, it is a separate matter.  Therefore, if a debtor utilized the assistance of an attorney to file bankruptcy, the debtor cannot assume that the same attorney is handling the Adversary.  Meaning, the debtor must be aware of the time to file a response to the Adversary.  The Adversary will have similar procedural requirements as litigation that is conducted outside of the Bankruptcy Court.  Therefore, it is important that individuals promptly respond to claims that are alleged in an Adversary.  It is further recommended that if one receives an Adversary complaint, they promptly seek the assistance of counsel to aid in responding and navigating both substantive and procedural issues that arise in an Adversary.

For more information on this topic, please contact Bradley J. Stevens or Joel F. Newell, members of the Jennings Strouss Bankruptcy, Restructuring, & Creditors’ Rights Department.

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Joel F. Newell | Read Bio