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Adversary Proceedings

What is an Adversary Proceeding?

An adversary proceeding is a lawsuit filed within your bankruptcy case. They are initiated by filing a complaint with the bankruptcy court. Only a creditor, a trustee, or the bankruptcy filer can bring an adversary proceeding. Only certain kinds of matters may be brought as an adversary proceeding. One major benefit to filing an adversary proceeding as a consumer is that no additional filing fee is required. On the other hand, filing a similar claim in a Federal District Court would require paying another filing fee in addition to the bankruptcy filing fee.

Creditors and Adversary Proceedings

For example, a creditor may bring an adversary proceeding to object to its debt being discharged. This is generally done if the debt falls within one of the exceptions to a discharge or when the creditor believes that the bankruptcy was filed in bad faith. If a bankruptcy is filed for honest purposes, it is very rare that a case will be dismissed as a bad faith filing. Bad faith filings are those that attempt to manipulate the Bankruptcy Code for less-than-savory purposes, not those that attempt to use the Bankruptcy Code to obtain a fresh start on the best possible terms. Remember that the Bankruptcy Code was enacted to give the honest but unfortunate debtor a fresh start, unencumbered by the weight of previous debts.

Trustees and Adversary Proceedings

When a trustee files an adversary proceeding, it is generally because the trustee wants to dismiss the case as a bad faith bankruptcy filing or because the trustee wants to convert the case from a Chapter 7 to a Chapter 13 bankruptcy. Trustees may also use adversary proceedings to claw back payments made to creditors before your bankruptcy case was filed. A Chapter 7 trustee may use an adversary proceeding to return property to the bankruptcy estate. In general, so long as you are honest with your bankruptcy attorney, and disclose all of your financial affairs, you will not see an adversary proceeding filed in your bankruptcy case by a creditor or trustee.

Consumers and Adversary Proceedings

People filing for bankruptcy can also bring adversary proceedings. These are almost always brought against creditors for violations of the automatic stay or the discharge injunction. Generally, an adversary proceeding brought for a stay or discharge violation will also contain other claims based on federal and state law. Your attorney can tell you which claims are available to you. If your creditors are harassing you during or after your bankruptcy case, you have the right to file an adversary proceeding. Doing so protects your rights and can result in your collecting damages for the creditor’s misconduct.

In particular, discharge violations tend to create more claims than the violation itself. For example, if a creditor continues to report a discharged debt as delinquent and continues collection attempts on that debt, the creditor has likely violated both the Fair Credit Reporting Act [i] and the Fair Debt Collection Practices Act. [ii] In such a situation, it is possible to recover damages for the discharge violation, the fair credit reporting violation, and the fair debt collection violation in the same case. Although these kinds of claims can go to trial, it is common to see creditors settle these claims before substantial litigation takes place. This is because most creditors have funds set aside specifically for satisfying judgments and settlement agreements.

Miranda Baker, Orland Park, Illinois: A Discharge Violation

Miranda, a former United States Marine Captain, filed a Chapter 7 bankruptcy in August 2010 and received her discharge at the end of October 2010. In her bankruptcy filing, she named Mastercharge as one of her creditors. Her balance due on her Mastercharge account was $30,000. Mastercharge received notice of both the bankruptcy filing and the discharge. It did not object to her discharge. In early 2011, Miranda checked her credit report. Although Mastercharge was properly reporting her debt as discharged, there was a $30,000 debt being reported by a company called Stride Credit Solutions. Miranda had never heard of the company, and filed a dispute with each of the three credit reporting bureaus.

All three credit bureaus reported to Miranda that Stride Credit Solutions was claiming her debt was past-due and owing to Stride Credit Solutions. Miranda, through her attorney, provided each bureau with a copy of her bankruptcy discharge and list of creditors from her Chapter 7 petition. She assumed that doing so would clear up the problem. About a month later, Miranda received a collections notice from Stride Credit Solutions. It stated that her account was several months past-due and offered her a one-time payoff amount of $10,000. Instead of paying off the account, Miranda contacted her attorney again. Miranda’s attorney informed her that debt purchasers are common in the industry. Because so many people aren’t aware of their rights, debt purchasers will buy discharged debts from other creditors and attempt to collect on those debts. The debts are purchased for a fraction of the balance due, which means that even collecting a small amount of money is profitable. Miranda’s attorney also informed her that in addition to being a discharge violation, he had identified several other claims based on the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA) and the Illinois Consumer Fraud and Deceptive Practices Act (ICFA).

Miranda signed a contingency fee retainer with her attorney.. A contingency fee retainer is an agreement between an attorney and his or her client that the attorney will only be paid if the client’s lawsuit ends in the client’s favor. The attorney drafted an adversary proceeding complaint and filed it with the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division. In the complaint, her attorney alleged a violation of the bankruptcy discharge as well as violations of the FDCPA, the FCRA and ICFA. About two weeks after Stride Credit Solutions was served with the adversary proceeding complaint, Stride’s attorney filed a motion to dismiss the adversary proceeding. Miranda, through her attorney, responded to the motion. After oral argument on the motion, the bankruptcy judge denied Stride’s motion. The next day, Miranda’s attorney sent a settlement offer to Stride, requesting $25,000 in damages and his attorney’s fees. After some negotiations between Stride’s attorneys and Miranda’s attorney, Stride agreed to pay a total of $30,000 to settle Miranda’s claims. It also agreed to cease all collection and credit reporting activities on the debt.

Objecting To Proofs of Claim

It is not necessary to file an adversary proceeding to object to a proof of claim. However, an adversary proceeding can be used to object to a proof of claim where other claims can be asserted against the party filing the claim. This means of objecting to a proof of claim is similar to filing a counterclaim in a state court foreclosure action.

Leroy Williams, Frankfort, Illinois: Objecting to a Proof of Claim

Leroy filed a Chapter 13 bankruptcy in order to strip the second mortgage from his property and rebuild some equity in his home. American Bank Corp., the entity that services Leroy’s second mortgage, has filed a proof of claim in Leroy’s case. Leroy feels that the amount of the claim is high and asks his attorney to dispute the bank’s proof of claim. Before filing the objection, Leroy’s attorney asks Leroy for his most current mortgage statements. He notices that in the months immediately before Leroy filed for bankruptcy, Leroy’s mortgage payment increased significantly. Itemized on the statements were charges for property insurance. Leroy has always maintained his own property insurance. His lender had improperly “force-placed” insurance on the property. This force-placed insurance was being billed at a rate three times that of normal homeowner’s insurance. Instead of filing a typical objection to the proof of claim, Leroy’s attorney drafted an adversary proceeding complaint alleging breach of contract and filed it as his objection to the proof of claim. The adversary proceeding ultimately settled with the bank agreeing to remove the charges for the force-placed insurance from its claim and paying Leroy’s attorney’s fees.