How Does Bankruptcy Litigation Affect a Bankruptcy Case?

Bankruptcy Court Hearing Document and Judges gavel on a desktop.

If issues arise about property or debts during a bankruptcy case, the bankruptcy trustee, a creditor, or the debtor may file an adversary proceeding.  These proceedings are bankruptcy litigation and constitute court actions separate from the bankruptcy itself.  While adversary proceedings do not occur in every bankruptcy case, anyone involved in a bankruptcy should understand how bankruptcy litigation affects a bankruptcy case.

Who Can File Bankruptcy Litigation?

An adversary proceeding filed during a bankruptcy case must relate to the bankruptcy itself.  The bankruptcy court does not have jurisdiction to decide unrelated legal issues.

If a dispute or disagreement arises about property in the bankruptcy estate (or excluded from the estate) or about specific debts, a creditor or the bankruptcy trustee (or the United States Trustee) may initiate bankruptcy litigation by filing a complaint with the bankruptcy court.  In some situations, such as when a creditor violates provisions of the U.S. Bankruptcy Code, the debtor also may file an adversary proceeding.

What Issues Does Bankruptcy Litigation Address?

Rule 7001 of the Federal Rules of Bankruptcy Procedure provides a non-exclusive list of types of adversary proceedings:

  • To recover money or property, other than a proceeding to compel delivery of property to the trustee
  • To determine the validity, priority, or extent of a lien or other interest in property, with limited exceptions
  • To obtain approval for the trustee to sell the debtor’s and co-owner’s interests in property, if certain conditions are met
  • To object to or request revocation of a discharge in certain situations
  • To request revocation of an order of confirmation of a chapter 11, 12, or 13 plan
  • To determine dischargeability of a debt
  • To obtain an injunction or other equitable relief, in certain cases
  • To subordinate an allowed claim or interest, in some situations
  • To obtain a declaratory judgment relating to any of the preceding issues

A common type of adversary proceeding is a creditor challenge to the discharge of a debt.  In general, an adversary proceeding initiated by a creditor or the trustee often involves allegations of actual or constructive fraud relating to property or a debt.

What Happens During Bankruptcy Litigation?

Specific rules apply to bankruptcy adversary proceedings.  Until the court resolves the issues in the adversary proceeding or a negotiated settlement resolves the dispute, the bankruptcy case remains in pending status. The goal of the rules is to resolve issues quickly and fairly, so that the bankruptcy case can proceed. 

Bankruptcy litigation begins with filing of a complaint.  The defendant has a limited amount of time to respond by filing an answer or other responsive pleading.

If the defendant does not respond with an answer or other pleading, the bankruptcy court will enter a default judgment against the defendant and in favor of the complainant.  If the defendant responds, the bankruptcy judge holds a hearing to gather evidence before deciding the issues in the case.

Bankruptcy court proceedings in bankruptcy litigation are formal proceedings, subject to rules governing the process and introduction of evidence.  Compilation of evidence and testimony requires knowledge of bankruptcy law and the bankruptcy court process.  Presenting that evidence to the court and making supportive legal arguments also require familiarity with bankruptcy litigation.    

Handling all the aspects of an adversary proceeding requires special skill and experience with bankruptcy litigation.  Representation by experienced bankruptcy litigation counsel is essential for both parties to the proceeding.

While some bankruptcy attorneys who assist clients with bankruptcy filings handle adversary proceedings that arise during the bankruptcy case, many do not.  A bankruptcy litigation attorney is a lawyer who chooses to focus solely on adversary proceedings and contested matters that arise during a bankruptcy case, rather than on handling the bankruptcy case itself.

Bankruptcy litigation does not arise in every bankruptcy case.  Even if an adversary proceeding is filed, the underlying bankruptcy case is not necessarily doomed.  In many cases, the issues in the litigation can be resolved, so that the bankruptcy case can proceed. 

In some situations, a bankruptcy litigation attorney may be able to negotiate a resolution acceptable to both parties, so that the adversary proceeding does not need to go through a full court hearing and final decision by the judge.  When the issues are resolved by the bankruptcy court or through a mutually agreeable settlement, the bankruptcy litigation ends, and the underlying bankruptcy case proceeds.

Talk With a Trusted Minnesota Bankruptcy Litigation Attorney

Bankruptcy litigation is factually complex and requires a thorough understanding of bankruptcy law and rules of procedure.  At the Dave Burns Law Office, bankruptcy litigation is a primary focus of my practice.  I represent creditors and debtors in adversary proceedings, including bankruptcy litigation from referring attorneys.

My broad-based experience in all types of bankruptcy litigation includes developing a sound courtroom strategy, as well as negotiating and evaluating possible settlements and compromises to resolve the issues.  I work closely with each client to explain the bankruptcy litigation process and explore possible options and solutions, so the client can make a fully informed decision about how to proceed.

Whether you are the debtor or a creditor in a bankruptcy case, I welcome you to contact me if you face a potential adversary proceeding.  Please call (612) 677-8351 or send an email to dave@daveburnslaw.com. I am available to meet with clients in both Minneapolis and St. Paul and welcome inquiries from clients and referring attorneys throughout the State of Minnesota.

Categories: Bankruptcy, Litigation

The Dave Burns Law Office hopes you find this article helpful. But please do not rely on it as legal advice. The law changes regularly and the outcome of any legal matter depends on its unique circumstances. View full disclaimer