Bankruptcy is generally defined as a federal court process that is used by persons and/or entities who owe an overwhelming amount of debt to creditors and need to seek relief from either all or some of their debts.

According to the guidelines provided in the U.S. Bankruptcy Code, there are several different kinds of bankruptcy that a debtor may file for, such as Chapter 7, Chapter 11, and Chapter 13. Chapter 7 happens to be the most common type of bankruptcy filed.

A debtor who qualifies and successfully files for Chapter 7 Bankruptcy will receive a discharge, which is a court order that will permanently release them from certain debts (e.g., credit card balances). In exchange for having their debts erased, the debtor must agree to reimburse creditors by allowing them to repossess and sell nonexempt property.

A debtor will most likely be eligible to file for Chapter 7 Bankruptcy if they have high amounts of unsecured debt that they need immediate relief from and their income falls below or is equal to the median income level in their state.

It is important to note, however, that not all debts can be eliminated by filing for Chapter 7 Bankruptcy. For instance, if you owe personal injury or wrongful death awards from a prior lawsuit, those debts cannot be discharged through bankruptcy proceedings. Also, if a creditor files an adversary complaint against you, it will be much harder to obtain a discharge.

What is an Adversary Complaint?

An adversary complaint is a type of civil lawsuit that may be brought against a debtor who is filing for bankruptcy. Although adversary complaints are related to the primary bankruptcy matter, they are considered a separate case. Thus, the adversary complaint lawsuit will be assigned a different case number and will need to be resolved as a separate matter.

Adversary complaints seek to block a debtor from receiving a bankruptcy discharge. If successful, the court may issue a judgment against the debtor that denies them from obtaining a discharge. Such complaints are typically filed by creditors who believe that a debtor has obtained money under false pretenses or fraud, or that the debtor is willfully destroying or giving away property to avoid having a creditor sell it to pay off their debts.

Consider the following adversary complaint proceeding example:

  • Suppose a debtor filed for Chapter 7 Bankruptcy to seek relief from their insurmountable debts. Before filing, the debtor purchased a brand new entertainment system. To avoid having the entertainment system repossessed and sold by creditors during bankruptcy proceedings, the debtor asked a friend to hold on to it until after their bankruptcy case was resolved.
  • When the creditor whose services were used to purchase the system asks to sell it to recoup losses, the debtor denies owning it and claims he bought it as a gift for a friend.
  • After an investigation, the creditor discovers that the debtor is lying. The creditor promptly and properly files an adversary complaint within the allotted time period, alleging that the debtor willfully gave away property to hide it from them. As a result, an adversary complaint proceeding commences, which then delays the initial bankruptcy case until the adversary complaint matter is resolved.

Who Can File an Adversary Complaint?

While most adversary complaints are usually filed by creditors or bankruptcy trustees, debtors may also file adversary complaints as well. For instance, a debtor may file an adversary complaint against a creditor when a creditor continues to harass the debtor for payment, even though the debtor has received a discharge order from the bankruptcy court.

Adversary complaint proceedings are governed by Federal Rule of Bankruptcy Procedure Rule 7001. According to this rule, they may only be filed for certain reasons (e.g., obtaining an injunction, determining the dischargeability of a debt, etc.). Also, the requirements for filing an adversary complaint can vary, depending on the location of the bankruptcy court hearing the case, the party filing the complaint, and the reason the complaint is being filed.

In general, however, a party can initiate an adversary proceeding by filing a complaint in the same federal bankruptcy court that is overseeing the original bankruptcy case. The adversary complaint must provide details about the issue, state the reason it is being filed, and propose the type of relief that the party is seeking.

After the necessary filing fees are paid and the complaint is officially filed, a copy of the complaint and summons must be served on the opposing party. The opposing party will then have a certain amount of days to respond to the complaint. If the defendant does not respond within the allotted time period, then the plaintiff can file a request to have a default judgment entered against the opposing party.

If the defendant responds, then the parties will go through the standard stages of trial, including a pre-trial hearing, discovery, pre-trial filings, and the trial itself. The adversary proceedings will continue until a judge issues a decision or the parties reach a settlement.

What If the Defendant Doesn’t File an Answer in an Adversary Complaint?

As previously mentioned, if a defendant fails to respond to an adversary complaint, then the plaintiff may file an Application for Default Judgment. A default judgment is a binding judgment entered in favor of the party who brought the claim, or alternatively, against the party who failed to take action. In this instance, it refers to a defendant who does not respond to an adversary complaint.

A judge will then review the plaintiff’s application and decide whether to issue a default judgment or schedule a hearing. If the defendant fails to appear for the hearing as well, then a default judgment will be entered against the defendant and the case will be closed. If the defendant appears for the hearing, then the consequences will depend on why the defendant failed to respond and it will be at the discretion of the judge to decide how to proceed.

A debtor who does not respond to an adversary complaint and receives a default judgment against them may not only lose their opportunity to secure a discharge in their bankruptcy case, but may also have a money judgment entered against them. Thus, it is extremely important that a debtor promptly responds to an adversary complaint.

Should I Hire an Attorney If I am Facing an Adversary Complaint?

As discussed above, an adversary complaint is considered an entirely separate lawsuit from the original Chapter 7 Bankruptcy case. Consequently, a debtor’s bankruptcy lawyer is not under any obligation to represent them during an adversary complaint lawsuit. Although some lawyers will offer to handle both cases, not all of them will agree to do so.

Therefore, if you are facing an adversary complaint lawsuit and your current bankruptcy lawyer refuses to take on the second case, you should contact a local bankruptcy lawyer for assistance as soon as possible.

An experienced bankruptcy lawyer will be able to explain the consequences of what could potentially happen if the creditor or trustee wins the adversary complaint lawsuit, and will know the laws, procedures, and requirements that apply to such lawsuits. Your lawyer can also make sure that you file a response on time, can help you collect evidence that weakens the opposing party’s case, and can provide representation in court on the matter.