Adversary proceedings: Being sued in bankruptcy and what to do about it.

Friday 5th of October 2012 01:13:27 AM

Adversary proceedings.  A lot of debtors enter bankruptcy painfully unaware that they can be sued in bankruptcy.  The bigger surprise, usually for debtors who have hired legal counsel, is that the defense of such lawsuits is not covered in their retainer.

You can be sued by creditors in bankruptcy.  The grounds are numerous, but the most common are those controlled by Section 523 of the Bankruptcy Code.  The most common grounds involve preferential transfers (paying off debts to ‘insiders’ right before filing), major purchases or cash advances on credit cards right before filing for bankruptcy (the previous 90 days are the most common), or borrowing funds based on false or misleading information (overstating income when applying for a loan, for example). Lastly, such lawsuits can be brought for outright fraud.  There are more grounds, but a full discussion would be beyond the scope of this post.

Bankruptcy Trustees could also bring such actions against debtors, usually to undo transfers or to demand the return of assets sold to others, payoff of debts just before filing, and a few others.

Understand that such actions typically seek the non-dischargeability of the debt (i.e that the debt survive your bankruptcy) or that the asset be returned for purposes of paying your creditors.

If you are sued in bankruptcy, you and your attorney (if you have hired one) will be served with a summons and complaint.  Beware, failing to defend yourself against such a lawsuit will likely result in a money judgment against you.  More importantly, if you have paid your attorney a flat fee to prepare your bankruptcy petition and appear at your Meeting of Creditors, then you have very likely not hired them to defend any such actions.  In fact, the majority of bankruptcy attorneys don’t even do such work.  If you are sued in bankruptcy and your attorney cannot help you, you will have to find an attorney who does.

Our office has both prosecuted and defended adversary proceedings in bankruptcy, for both creditors and for debtors.  We represent clients in bankruptcy for only the adversary proceedings, oftentimes through referral from other bankruptcy attorneys who were only hired by the client to file the petition alone.

Whatever you do, don’t presume that your defense is covered under your retainer, because it usually is not.  Find a law firm that does, if you are in the Southern California area, we can help.

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