Facing Adversary Proceedings That Challenge Discharge of Debts

The goal of a bankruptcy is to obtain a fresh financial start by having some or all of your debts discharged — namely, wiped out. However, there may be reasons that a creditor or the bankruptcy trustee objects to the discharge of certain debts or to all of them. This sometimes results in an adversary proceeding, and it can have potentially disastrous consequences for the success of the bankruptcy case.

An adversary proceeding is in essence a case within a case. It can be filed by a creditor or the bankruptcy trustee for multiple purposes, including to challenge the dischargeability of one or more debts. The complaint filed by the creditor or trustee must allege specific grounds, such as that the debtor:

• Obtained money through fraud
• Embezzled money
• Willfully and maliciously injured the creditor or the creditor’s property
• Damaged, hid or fraudulently transferred property to frustrate creditors or the trustee
• Unjustifiably damaged, hid, forged or failed to preserve financial assets, property or business records
• Made false statements in the course of the bankruptcy proceeding
• Failed to obey lawful orders of the bankruptcy court
• Refused to respond to material questions during the proceeding, other than to avoid self-incrimination

After the complaint filing comes the discovery phase, in which each party is entitled to request relevant evidence from the other, and the court has the power to enforce a valid request. This is a critical stage in the proceeding, since the debtor can use it to compel the plaintiff to produce all pertinent evidence.

It is often possible to resolve or an adversary proceeding through direct negotiation or alternatively through mediation before a neutral third party. In appropriate cases, the bankruptcy court will appoint a free mediator to help resolve the dispute. This is typically an experienced bankruptcy attorney or a retired bankruptcy court judge. The adversary proceeding will be delayed pending the mediation outcome. Bankruptcy Panel Mediation is always less expensive than trial. I resolve approximately 50 percent of my adversary proceedings through mediation.

If no agreement can be reached through negotiation or mediation, there comes a trial, at which the parties present their evidence for and against debt discharge. As the debtor, you can try to expose inconsistencies in the plaintiff’s evidence by impeaching the credibility of witnesses or disputing the accuracy of documents. You can present your own evidence supporting alternative versions of the actions and events asserted by the plaintiff.

At the close of the trial, the judge decides whether or not the debt at issue is dischargeable. If the judge finds that the debtor engaged in fraudulent or bad faith conduct during the bankruptcy, the entire bankruptcy might be dismissed or the debtor’s discharge might be denied. Since the stakes are quite high, the debtor should be represented by bankruptcy counsel who is skilled and experienced in adversary proceedings.

The Law Offices of Michael Jay Berger in Beverly Hills is one of California’s most experienced bankruptcy law firms, with a record of success in representing debtors and creditors in adversary proceedings. If you need our help with any bankruptcy matter, contact us online or call 310-271-6223 to schedule a consultation.