Creditors often face major losses when debtors file for bankruptcy. Bankruptcy rules prohibit continued collection efforts due to the automatic stay granted by the courts that takes effect on the same day as the filing. Companies may even need to dismiss pending lawsuits in response to a debtor’s bankruptcy.
Debtors can frequently discharge many of their financial obligations, from unpaid medical bills to credit card balances. Provided that they successfully complete the bankruptcy process, they no longer have a legal obligation to repay discharged debts, and creditors cannot resume collection efforts for discharged debts.
Creditors often assume that they have no rights once a debtor initiates the bankruptcy process. However, they may have the option of seeking relief through an adversary proceeding.
What is an adversary proceeding?
An adversary proceeding is essentially a supplemental lawsuit filed in response to an individual’s bankruptcy. Creditors ask for relief based on their interpretation of circumstances. Frequently, the goal of an adversary proceeding is to lift the automatic stay and resume collection efforts.
Occasionally, creditors may ask the courts to exclude their debt from the bankruptcy due to fraud or similar concerns. Particularly when the person seeking bankruptcy took on debt immediately before filing or has a history of engaging in financial misconduct, the courts may agree that a creditor deserves relief from the legal protection provided in bankruptcy.
Creditors notified of a debtor’s pending bankruptcy case may need to evaluate their options. Consulting with an attorney familiar with the laws protecting creditor rights during bankruptcy can help business leaders and members of their support staff determine if requesting an adversary proceeding is an appropriate response.