Defending Against Adversary Proceedings Brought by Creditors

Bankruptcy offers a fresh start for debtors struggling with overwhelming debt. However, this process isn’t always smooth sailing. Creditors may object to various aspects of the bankruptcy case by bringing an adversary proceeding — essentially, a case within the case. Such proceedings can arise when creditors challenge discharge of debts, allege fraudulent transfers or attempt to avoid preferential transfers. 

The type of challenge raised by the creditor determines what strategies the debtor may use in response. The following are the most common scenarios:

• Discharge challenges — Creditors can object to discharge of all debts or selected debts if they believe the debtor engaged in misconduct, such as failing to disclose income or assets, destroying financial records or incurring excessive debt right before filing. To counter these claims, debtors can provide detailed financial records and demonstrate acting in good faith throughout the bankruptcy process. Additionally, legal counsel can help navigate discharge exceptions and ensure the debtor meets all eligibility requirements.
• Fraudulent transfers — Creditors may allege that the debtor transferred assets shortly before filing for bankruptcy in order to shield them from being seized. To prevail, creditors must prove the transfer was made with the intention to defraud. Debtors can defend against this allegation by demonstrating the transfer was made for legitimate reasons, such as paying ordinary business expenses or settling pre-existing debts. Evidence of fair market value exchanges and proper documentation can strengthen the debtor’s position.
• Preferential transfers — Bankruptcy law prohibits preferential transfers. These are payments made to certain creditors within a specific timeframe (usually 90 days before filing for bankruptcy), thereby giving them an unfair advantage over others. The most common defense raised by debtors to a preferential-transfer challenge is the “ordinary course of business” argument. This asserts that payments were made in accordance with established business practices and terms existing before the debtor’s financial struggles began. Debtors can also argue the “contemporaneous exchange for new value” defense, which applies to payments made for goods or services received at roughly the same time. Finally, the “subsequent new value” defense can be used when the creditor provided additional goods or services after receiving the allegedly preferential payment, offsetting the advantage gained.

Beyond specific defenses, debtors can take proactive steps to strengthen their position. Maintaining meticulous financial records throughout the bankruptcy process is paramount. This documentation becomes critical evidence when responding to creditor challenges. Additionally, debtors should be transparent and cooperative with the bankruptcy trustee, demonstrating a sincere desire for a successful resolution. In addition, a qualified bankruptcy attorney can provide tailored legal advice, deal with complex legal issues and represent the debtor effectively in adversary proceedings.

At the Law Offices of Michael Jay Berger in Beverly Hills, California, our attorneys know how to protect your rights and navigate adversary proceedings effectively. Call us at 310-271-6223 or contact us online to schedule a free consultation.