BANKRUPTCY AND ADVERSARY PROCEEDINGS

HOW BANKRUPTCY WORKS

Bankruptcy is mentioned in the Bible and every civilized society in the World has always had some form of bankruptcy law. Without a bankruptcy law creditor pressure would be a damper on the economy. Debtors would have less of an incentive to work hard and/or to start a business for fear that their wealth would be taken by creditors. Many businesses would go underground (and not pay taxes).
Bankruptcy lets the “honest but unfortunate debtor” get a fresh start (in most countries “every seven years”). The Debtor can eliminate his or her unsecured debt and keep whatever property he needs to live on, such as a home, car, clothes and furniture. Any excess property must be turned over and sold for the benefit of creditors. This excess property may only recover a few cents on the dollar for these creditors, but that will be all that they receive and the debtor will no longer have to pay the debt. The Debtor can also often get time to pay his secured debt or if he chooses eliminate the debt by surrendering the collateral.
The ordinary debtor usually does not have any in excess of that which he needs to live on (ie “exempt property”) and his debts will be eliminated and he will keep all his property. This foregoing is a “bare bones” description of the theory of bankruptcy.

WHAT IS AN ADVERSARY PROCEEDING

An Adversary Proceeding is a lawsuit that arises out of the bankruptcy. In most consumer bankruptcies there are no adversary proceedings. Many adversary proceedings concern whether a particular debt is an “honest debt” and should be “discharged” or whether a debtor’s wrongful acts should bar the discharge of all his debts. Other common adversary proceedings concern whether a debt is secured or whether a creditor received a payment on his debt so close to bankruptcy that the amount paid should be returned to be shared proportionally with all creditors or whether the debtor parted with valuable assets close to bankruptcy for little or no money so that the property should be returned and sold for the benefit of creditors.

DEFENDING ADVERSARY PROCEEDINGS

Most of the standard principles of bankruptcy and of adversary proceedings are well known and easy to explain and easy to understand. However there is no limit to how complex a bankruptcy case or an adversary proceeding might become. State law plays a critical role in bankruptcy and in virtually all adversary proceedings. For instance property rights (for the most part) are defined by state law. If you live in a Community Property State your real property may receive different treatment than real property that you own in a “Tenants By the Entireties” state. In addition Federal law apart from the Bankruptcy Code also plays a critical role.
No attorney knows the best way to defend every adversary proceeding “off the top of his head”. And no attorney has seen every possible problem or combination of problems. Since a bankruptcy and/or an adversary proceeding can involve any possible combination of facts and any combination of underlying legal principles even the best attorneys will often find problems that are initially difficult to understand..
Our firm provides a free evaluation of every case and for every legal problem for potential clients and for attorneys. This gives us all a start in determining the nature of the problem and the best approach to solving it.