Chapter 7 Bankruptcy

Written by Craig D. Robins, Esq.

On March 10, 2005, the Senate approved the most sweeping reform of U.S. bankruptcy law in decades. The legislation will next go to the House of Representatives, which is expected to approve it. President Bush has said he will sign the measure, which could take effect by late summer.

For seven or eight years, I have written numerous columns discussing Congressional attempts to pass bankruptcy reform legislation. Unfortunately, it appears that reform is finally here. The new law is a dream bill for credit card companies, one that will essentially make it much more difficult for consumers to eliminate debts in a Chapter 7 proceeding. Opponents of the bill complain that the new laws will do nothing to curb corporate excesses or keep rich people who file for bankruptcy from sheltering their assets. In addition, critics say that credit card companies are largely responsible for the high rate of bankruptcies because they heavily promote credit cards and loans that often come with large and largely unseen fees for late payments. The new laws do not contain any provisions to curb credit card company abuse.

There will certainly be a surge of filings as cash-strapped consumers try to get a jump on the new laws that will make filing much tougher for people to erase their debts through existing bankruptcy proceedings. Middle-income families who comprise the majority of filers, will be affected the most. It will now take much longer for families suffering serious illnesses, unemployment, divorce or other economic calamities to get a handle on their debt situations.

Below are the key provisions and effects of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” also known as S. 256. Some columnists have nicknamed this legislation “the Debt Slavery Bill.”

Chapter 7 Means Test. Debtors will have to meet specific income requirements to be eligible for Chapter 7 bankruptcy status. If a debtor’s income exceeds the state’s annual household median and can make payments of at least $100 a month for a period of five years, they will be forced to seek Chapter 13 status instead, which requires a payment plan.

Higher Attorney’s Fees. The new filing requirements will mean more paperwork and potential court time, which translates to higher fees. In addition, a very controversial provision of the bill provides that debtor’s attorneys can be held liable for fraud if their clients withhold information and assets in hopes of qualifying for Chapter 7 status.

Living Standards Requirements. Internal Revenue Service standards for living expenses will determine monthly spending guidelines for food, housing, clothing, personal care and transportation under the new law. Any remaining funds would be considered disposable income which debtors would be required to use to apply to their debts.

Mandatory Credit Counseling. The bill requires debtors to go through credit counseling for at least 6 months before filing for bankruptcy, and further provides that a debtor cannot receive a discharge until they complete a personal financial management course.

Longer Repayment in Chapter 13. The current minimum payment plan under Chapter 13 is three years. The new legislation would stretch the minimum to five years.

As we go to press, the House of Representatives, who had been scheduled to vote on the bill this week, just announced that it will postpone activity on the bill due to Congressional travel to the Pope’s funeral. We now expect the House to consider the bill sometime during the middle of April.

Incidentally, according to the latest filing statistics compiled by the Administrative office of the U.S. Courts, bankruptcy filings set a record for the quarter ending June 30. During this time, there were 400,394 filings. The record number can be attributed to the pressure of a shaky economy and the impulse to act soon before new bankruptcy reform laws limit the opportunity. It is also interesting to note that according to a recent investigative article in the L.A. Times last month, the profits at America’s big credit card companies have risen along with the number of bankruptcy filings over the past eight years, despite these companies’ claims to Congress that they are losing money because of the increased number of bankruptcy filings. The credit card companies were able to remain highly profitable because they charged customers different interest rates depending on how likely there were to repay their debts, and by also adding substantial fees for late payments.

Once the reform bill is signed into law by the President, some provisions will become effective immediately, while other provisions will not become effective for several months. It would prudent for all clients who are contemplating bankruptcy to file as soon as possible, preferably before any law is signed. That means now.

 About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the April 2005 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

There are many issues facing the plaintiff negligence attorney whose personal injury client files for bankruptcy. Here are some bankruptcy fundamentals that you should be aware of.

Bankruptcy Involves Different Statutes and Rules. Most personal injury attorneys practice relatively little in Federal Court, let alone Bankruptcy Court. Thus, when their P.I. client files for bankruptcy, a different world opens up with intimidating statutes and rules much different than those usually encountered in the typical Supreme Court action. Bankruptcy practice is governed by the United States Bankruptcy Code and the Bankruptcy Rules. The Bankruptcy Courts in New York employ the Federal Rules of Civil Procedure as opposed to the C.P.L.R. In addition, there are “local rules” for the two Bankruptcy Courts that comprise the Eastern District of New York, located in Central Islip and Brooklyn.

Personal Injury Suits and Causes of Action are Assets. A serious injury that gives a debtor the right to sue for personal injury is an asset of the bankruptcy estate. The debtor can exempt the first $7,500 in net proceeds, but anything over and above that belongs to the bankruptcy estate.

All Causes of Action Must be Scheduled. It is very important to make sure that the debtor scheduled the P.I. suit or cause of action in the bankruptcy petition. The debtor’s failure to schedule a potential cause of action may actually work as a meritorious defense to the entire P.I. case, which can result in having the P.I. case dismissed. Current New York case law states that if a P.I. plaintiff filed a chapter 7 petition but failed to list a potential cause of action for personal injuries, then the plaintiff lacks standing to bring the P.I. action.

What to Do If Your P.I. Client Failed to List the Cause of Action. If your P.I. client failed to list the cause of action, then you should immediately contact the attorney who prepared the bankruptcy petition to discuss why this happened, and to determine whether any amendments were ever filed, or whether the matter was addressed at the first meeting of creditors. Unfortunately, some attorneys who prepare bankruptcy petitions are not thorough enough to cross-examine their clients as to such intangible assets as causes of action. Nevertheless, a debtor has the duty to amend his or her petition upon learning of any defects in the petition.

What to Do If You’ve Already Initiated Your P.I. Case and Your Client Files for Bankruptcy or Wants to File for Bankruptcy. Hopefully, your client discussed his or her intentions to file bankruptcy with you prior to actually doing so. In any event, you should contact your client’s bankruptcy attorney to make sure that all information about the suit has been, or will be, properly scheduled in the petition. Again, the main concern focuses around the value of the P.I. case and whether the trustee will deem the case to be valuable enough to administer. You should expect to provide the trustee with copies of the pleadings and the bill of particulars. If the case may have significant value, the trustee will get in touch with you

Always Ask Your New P.I. Client if They Filed for Bankruptcy. Many P.I. clients neglect to tell their attorney that they filed for bankruptcy after their accident. If you learn that your client filed for bankruptcy, then you should look at a copy of the bankruptcy petition to make sure the client listed the cause of action as an asset. Also make sure the debtor claimed the exemption for personal injury. If the client already filed for bankruptcy and did list the potential suit, then you will need to determine what action the trustee took.

The Trustee May Abandon the P.I. Case or Cause of Action. Most trustees will consider the right to sue for a relatively small injury as being of “inconsequential value to the bankruptcy estate” and may have already decided to abandon the trustee’s interest in the cause of action. Generally, if a P.I. case will not result in any significant non-exempt recovery (usually a gross award or settlement of less than $15,000 before attorney’s fees and disbursements), then the trustee will not care about administering it.

If the case appears to be of inconsequential value, then consider contacting the trustee and requesting him to provide you with a letter indicating that he intends to abandon the trustee’s interest in the matter.

Another option is to wait until the case is closed, as any property which is listed on the debtor’s schedules that is not otherwise administered before the case is closed, is deemed abandoned to the debtor. Thus, as long as the Court closes the bankruptcy, you will not need to get involved in Bankruptcy Court and you can continue with the case as you would have.

If more than a few months have passed since the debtor attended the First Meeting of Creditors, consider having the bankruptcy attorney check the court’s docket to see if the Bankruptcy Court closed the case or if the trustee formally abandoned the asset. The fact that the debtor received a discharge does not necessarily mean that the trustee abandoned the asset or that the court closed the case. Also, closing the first meeting of creditors is not the same thing as closing the bankruptcy case. If the case is still open, contact your client’s bankruptcy attorney to see if the trustee expressed any interest in administering the P.I. cause of action.

The Trustee May Want to Administer the P.I. Claim as an Asset of the Estate. If the case may be worth more than $15,000, it is likely that the trustee will not abandon the cause of action and will want to administer the bankruptcy as an asset case.

Representing a Debtor with a P.I. Suit That Is Being Administered by a Trustee Requires Court Approval. The Bankruptcy Code requires that all attorneys who render services to a debtor must be approved by the court. A trustee may employ as special counsel under a contingency fee arrangement, any attorney who has represented the debtor in pre-petition litigation, when it is in the best interests of the bankruptcy estate and the attorney has no interest adverse to that of the debtor or the estate. Theoretically, the trustee can hire any attorney of the trustee’s choosing to represent the debtor in the P.I. suit, and can even take the case away from the existing P.I. attorney. In practice, however, this rarely occurs. The trustee will almost always permit the existing P.I. attorney to continue with the P.I. case because a relationship already exists between the debtor and counsel, and because the P.I. attorney may be in the best position to represent the debtor with a negligence matter. Nevertheless, it would behoove you to co-operate fully with the trustee.

Handling a Debtor’s P.I. Case Requires a Retention Application. It will be necessary for you to file an application with the court to be retained as special counsel to the trustee for the purposes of prosecuting the P.I. claim. Annexed to the application should be a copy of the written retainer agreement between you and your client. The legal fee must be reasonable and it is subject to court review at the conclusion of the case.

The application will also include an affidavit of disinterest in which you must state that you have no claim that is adverse to the interests of the debtor’s estate. This means that you cannot be a creditor for legal fees not related to the pending P.I. case.

The trustee will usually prepare these documents (as well as any other necessary documents in the course of the bankruptcy) and submit them to the court after you sign them.

Appearances in Bankruptcy Court by P.I. attorneys are rarely necessary. The application to approve your fee after the case is settled is usually brought by the trustee and should not require your appearance.

Who Is Your Client Now? Once the trustee seeks your formal retention on behalf of the bankruptcy estate, you client is technically the trustee, rather than the plaintiff. Sometimes this can lead to some unusual ethical issues.

Will the P.I. Case Be Transferred to the Bankruptcy Court? A personal injury case is considered a non-core proceeding which means that it involves issues not directly involving the bankruptcy code. You can therefore anticipate that the P.I. case will be litigated in Supreme Court.

Will it Be Necessary to Amend the Existing Caption? Some trustees may require you to amend the caption to reflect the fact that the trustee has become the party plaintiff. Most trustees will not require this.

Effect of the Automatic Stay on P.I. Litigation. The automatic bankruptcy stay imposed by Code sec. 362 does not operate to stay any actions brought by the debtor. The stay only acts to stay actions brought against the debtor including cross-claims, counter-claims and third-party claims.

Settlement. Some trustees will require you to review all settlement negotiations with the trustee Other trustees will be content on hearing from you when you’ve reached a tentative settlement. All settlements will require the trustee to bring a motion to obtain Bankruptcy Court approval. The insurance carrier will thereafter want releases from the trustee as well as the plaintiff. It is important to maintain communications with the trustee as to all major settlement negotiations. The settlement is generally made payable to the trustee.

Your Legal Fee. Once the matter is settled, you will be required to submit an application for a “final fee allowance” in order to be paid. This is something that the trustee should assist you with.

Concluding Advice. The biggest variable in handling a valuable personal injury case of a debtor in bankruptcy is the attitude and disposition of the trustee. Contact the trustee at your earliest opportunity to get an idea of the trustee’s disposition and preferences.

Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Nassau Lawyer, the official publication of the Nassau County Bar Association in New York. This article appeared in th April 2005 issue of the Nassau Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com

Written by Craig D. Robins, Esq.

Gambling has long been a culprit that drives people into bankruptcy. With Atlantic City and Indian casinos a mere bus ride away, Long Islanders are finding it ever so easy to gamble away their hard-earned incomes and get into a bad debt situation. Combine that with horse racing and OTB, lotteries, bookies and now, internet gambling, and we have plenty of opportunities for individuals to lose their shirts. Day trading with stocks is also considered by many to be an addictive form of gambling. It is no secret that compulsive gamblers incur devastating debts on their credit cards to fuel their obsessions.

Gamblers often get trapped in a vicious cycle of taking cash advances for gambling in the hope that future winnings will then satisfy ever-increasing debt. Left unchecked, this cycle will usually drive the gambler into a downward vortex, destroying the gambler and his family financially.

Gamblers may actually have some luck on their side if they can take advantage of the current bankruptcy laws, as the filing of a Chapter 7 bankruptcy will enable the gambler to discharge most gambling debts. It appears that with the surge in legalized gambling across the country, bankruptcy courts have become more liberal in permitting gamblers to discharge their gambling debts.

However, proposed legislation, if enacted, will certainly make it increasingly more difficult for gamblers to discharge their debts. Such legislation is currently pending and would adversely affect all consumer filings, not just those of gamblers. One commentator suggested that the legislature is suffering from apparent schizophrenia—they are constantly legalizing more gambling, yet condemning the ever-increasing amount of consumer debt and the “ease” of its discharge.

The following are points that the consumer bankruptcy practitioner should be aware of with regard to discharging gambling debts of their clients.

1. Gambling debts are generally dischargeable. There is no statutory authority that expressly states that gambling debts are non-dischargeable. Therefore, gambling debts are not per se non-dischargeable.

2. A creditor must prevail in an adversary proceeding for a gambling debt to be non-dischargeable. All gambling debts are dischargeable unless a creditor objects to them in an adversary proceeding. Adversary proceedings are federal law suits brought within a bankruptcy. They are involved and costly for all parties. Going back several years, casinos and credit card companies often sought to object to discharging extensions of credit given to debtors at the casino. However, such suits are much less common today.

3. Creditors rely on certain statutory provisions when they allege that gambling debts are non-dischargeable. There is one major Bankruptcy Code provision that creditors generally use in adversary proceedings to challenge dischargeability of gambling debts. This is Code section 523(a)(2)(A) which provides an exception to discharge for debts obtained by “false pretenses, a false representation, or actual fraud.”

4. Creditors have the burden of proof. Although there appear to be fewer creditors today bringing adversary proceedings objecting to gambling debts, some creditors continue to bring such suits. A creditor seeking to object to a debt bears the burden of proof by a preponderance of the evidence as stated by the U.S. Supreme Court in the 1991 Grogan case.

5. Creditors must establish four elements. In order for a creditor to prove false pretenses, false representations or fraud, the creditor must generally establish each of four separate elements: a) false representation (the creditor must prove that the gambler made a false representation through which the gambler obtained money, such as by lying on a credit application); b) knowledge (the creditor must prove that the gambler either knew the representation was false or made with such reckless disregard for the truth as to constitute willful misrepresentations — this is often the major element that is litigated); c) scienter (the creditor must prove that the debtor intended to deceive); and d) justifiable reliance (the creditor must show that it actually relied on the gambler’s false representation and that creditor’s reliance was justifiable).

6. The reasonableness standard: subjective ability to pay has become the general rule. Earlier cases concerning whether debtors believed that they would be able to repay gambling debts focused on whether the debtor’s belief was reasonable from an objective viewpoint. The creditor would argue that the debtor “knew or should have known” that the debtor could not possibly pay back his debt. A debtor will often assert that his only hope of repaying a gambling debt is to win it big in the future. Prior cases held that gambling debts in such situations should be non-dischargeable because the debtor’s belief was not reasonable.

However, the current trend has shifted to a more subjective determination. One case held that the debtor’s “honest but somewhat questionable belief that he would soon get lucky at gambling and pay off his debts” demonstrated intent to repay. Thus, a debtor may be able to defeat the creditor’s position if the debtor can persuade the court that based on his history, the debtor genuinely believed that he would be able to pay his debts and that he had the intent to pay his credit card debts at the time he incurred them.

7. The courts are mindful of public policy arguments. In recent years, this country’s policies toward gambling have also shifted for social policy reasons. One Court’s position is this: At one point in time, not so far in the past, gambling was against public policy and gambling debts were not enforceable in a court of law. But public policy changed. Certain forms of gambling are now legal … . They are hyped as a source of jobs (i.e., casinos), as a source of revenue for government (i.e. Lottery proceeds used for education), and as a form of entertainment (i.e., casinos and off-track betting).

8. The luxury goods and cash advance exceptions can make the debt non-dischargeable. Code section 523(a)(2)(C) makes a debt non-dischargeable if it is for a “luxury good or service” over $1,225 that is purchased within 60 days pre-petition, or if it is a cash advance over $1,225 obtained within 60 days pre-petition. Problems with these exceptions can be easily avoided by properly questioning your client about their pre-petition credit use and then waiting the requisite period of time.

9. Beware of pending bankruptcy reform legislation. In some versions of the pending legislation bill, there is language that provides that a debt incurred when the debtor had no reasonable expectation or ability to repay it is non-dischargeable. This would adversely slam the liberal trend in the case law mentioned above. If the bankruptcy laws change, it may become much harder to discharge gambling debts.

10. Gamblers need non-legal help also. Compulsive gamblers suffer from an addiction disorder and need professional help. Although the bankruptcy practitioner can certainly help by providing the opportunity for a fresh new financial start, you should urge the client to seek professional help. In addition to counseling, there are support groups such as Gamblers Anonymous.

Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the March 2005 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

We have now seen several straight years of rapid real estate appreciation on Long Island. With the current real estate boom, most home prices have doubled in the past six years. Buoyed by low interest rates and a hot real estate market, the mortgage industry has become incredibly competitive and has relaxed many previous requirements that have acted as impediments to former bankruptcy debtors seeking to obtain a new mortgage or refinance an existing one. You can help your prior bankruptcy client purchase their first home, or take advantage of increased equity in their existing home by helping them with refinancing.

Homeowners with Bankruptcy Histories Are Often Able to Get Mortgages, Sometimes at Respectable Rates. With over a million and a half consumers filing bankruptcies each year, many mortgage companies have tapped into the lucrative market of offering mortgages to those who recently sought Chapter 7 bankruptcy protection, and even those still making payments in open Chapter 13 cases. Just a few years ago, debtors seeking to obtain mortgages under such circumstances found it difficult, if not impossible. Today, however, mortgage lenders actively solicit the profitable sub-prime market of recent home-owner debtors. A “sub-prime” mortgage is one where the borrower has a blemished credit history. Lenders, in their drive to maximize profits, have actually become quite lenient with the sub-prime market and have relaxed some previous requirements. Some lenders even specialize in providing financing to recent debtors. A former Chapter 7 filer can qualify for a mortgage one year after the bankruptcy is over.

Mortgage Companies Offer Various Mortgage Programs Depending on Financial History. Although the borrower may not qualify for the best rates (known as “A” paper) if there was a recent bankruptcy filing, they may nevertheless qualify for sub-prime rates, (known as “B, “C” or “D” paper). Lenders with programs for recent debtors will typically offer something like a two-year hybrid adjustable rate mortgage in which the mortgagor has the option of converting to a more conventional mortgage with better interest rates after a two year period of time, provided that the borrower makes timely payments and keeps his new credit history clean. Even former debtors who developed additional negative credit information after their bankruptcy was concluded can qualify for financing if they have a healthy loan-to-value ratio of 70% or less.

Debtors May Become Eligible for “A” Paper Mortgages Sooner Than They Think. According to some published guidelines, a former Chapter 7 debtor may be eligible for the best rate FHA mortgage just two years after the discharge if the borrower has re-established good credit or has not re-established any new credit. If more than two years have elapsed since the Chapter 7 bankruptcy was discharged and the borrower is applying for a VA mortgage, then the bankruptcy will not even be considered. If the borrower is applying for a conventional mortgage, then they will be considered for the best rate after four years, although some lenders will consider them after three years, if there is a good reason. For Chapter 13 debtors, the provisions are even better for FHA and VA mortgages. In such instances, debtors need only wait 12 months from the date of filing and may even be in an open case.

Debtors Should Consider Consulting a Mortgage Broker. Ordinarily, I steer my real estate clients directly to banks. However, when it comes to borrowers who have blemished credit histories or previous bankruptcies, I sometimes suggest that they consult with a mortgage broker, who will have access to many potential lenders, and who should be keenly familiar with the various sub-prime financing issues. As a variety of lenders offer different programs to borrowers with prior bankruptcies, a mortgage broker catering to this customer base should have a good familiarity with what program might be best for a particular borrower. Savvy brokers should also be able to give tips to clients in advance about improving chances for qualifying.

Chapter 13 Debtors in Open Cases Who Seek to Refinance Must Either Obtain a Court Order or Withdraw Their Case. If the borrower is still a debtor in a pending Chapter 13 case, refinancing a home will require seeking court approval of the refinance by bringing a motion. Consider discussing this issue with the Chapter 13 trustee if refinancing becomes a possibility. Alternatively, you may consider withdrawing the debtor’s petition, although you would only want to do this if the conditional mortgage commitment permits it, and the debtor can handle the unsecured debt after the case is dismissed. Also remember that the debtor loses the protection of the bankruptcy stay once the case is dismissed. Therefore, you should only withdraw a case if it appears absolute that all closing conditions have been met, and the closing will definitely occur.

Consumers Should be Cautious with Adjustable Rate Mortgages. Previous bankruptcy filers may have no choice other than obtaining an adjustable rate mortgage hybrid. At some point, the monthly payments for all adjustable rate mortgages increase. As your client previously got into a financial bind resulting in the prior bankruptcy filing, it is important that you advise them about preparing realistic future budget projections so that they do not end up in a future financial bind when the rate increases.

Many Abstract Companies Do Not Understand How Prior Bankruptcies Discharge Debts. Several times a year I deal with a lender or abstract company who insists, incorrectly, that certain discharged debts actually remain for various reasons. This usually happens when the client refinances without the aid of legal representation or uses an attorney who is unfamiliar with bankruptcy law, and I get a frantic call from the client while they are sitting at a closing table. In-house title examiners at abstract companies are notorious for their lack of knowledge about the implications of a bankruptcy filing. You should persuade former bankruptcy clients that it is advisable to utilize counsel for all real estate financing transactions. Then, if the lender’s abstract company raises a bankruptcy-related problem, insist on speaking directly with underwriting title company’s clearance department or legal department to clear up any bankruptcy-related title exceptions.

Practice Pointer for Helping Debtors with Mortgages and Re-financing: Be aware that financing is often available, advise your client of the options, and suggest that your client retains legal counsel for real estate transactions.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Attorney of Nassau, published in Nassau County New York for members of the bar. This article appeared in the December 2004 issue of the Attorney of Nassau. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

Adversary Proceedings. Even what appears to be the simplest Chapter 7 consumer bankruptcy filing may result in an adversary proceeding which is basically a federal lawsuit brought within a pending bankruptcy proceeding. The Bankruptcy Rules provide that certain contested matters in bankruptcy proceedings must be litigated in this way. Bankruptcy Rule 7001 sets forth ten such matters. They include objections to discharge; determination of the validity, priority, or extent of a lien or interest in property of the estate; actions to recover property of the estate; and proceedings to sell property in which the debtor is only a part owner. Bankruptcy Rule 7001 et. seq., sets forth all of the rules applicable to adversary proceedings.

Proceedings to Determine The Dischargeability of a Debt. These are by far the most common adversary proceedings that the consumer bankruptcy practitioner may encounter. With the proliferation of consumers seeking to discharge credit card debt through bankruptcy, many credit card companies, banks and other lenders are actively reviewing petitions and credit usage histories to determine if the debtor obtained the debt by way of any fraudulent or improper means. Under code section 523, a creditor can contest the dischargeability of a particular debt that was incurred through false pretenses, fraud, use of false financial statements, embezzlement, or larceny.

Contesting the Entire Discharge. Bankruptcy code section 727 allows an interested party to contest the entire discharge for intentional concealment, transfer or destruction of property; unjustified failure to keep books and records; dishonesty in connection with the bankruptcy code; or failure to explain loss of assets. If a trustee requests a debtor to provide documents at the meeting of creditors and the debtor is uncooperative, the trustee will bring an adversary proceeding under this section.

Federal Rules Govern. Virtually all of the Federal Rules of Civil Procedure regarding litigation apply to adversary proceedings. These rules are especially tailored to bankruptcy proceedings by Bankruptcy Rules 9001 et. seq. Leave your C.P.L.R. at home and get a copy of the Federal Rules. Sometimes the general practitioner is at a slight disadvantage because of an unfamiliarity with Federal law.

How Adversary Proceedings Are Commenced. The creditor or trustee will draft a complaint, setting forth the facts and allegations which the plaintiff believes justify the granting of relief against the debtor, and stating the relief requested. All adversary proceedings must be filed electronically through the court’s E.C.F. system. The court will also assign an adversary proceeding case number to the matter, which is different from the original bankruptcy case number. All adversary proceeding documents filed with the court must contain the full adversary proceeding caption, both case number and adversary proceeding case number, the type of chapter, and the name of the judge. The debtor can be referred to as either “debtor” or “defendant.”

Service. Most adversary proceedings are served pursuant to Bankruptcy Rule 7004(b) by first class mail upon both the debtor and his or her attorney, although service can be completed by other means as well. Service must also be made within 10 days of the summons date. Bankruptcy Rule 7004(f).

Be Aware of the Bar Date. In Chapter 7 proceedings, the court sets a statute of limitations for creditors to file objections to discharge. The bar date is 60 days from the date set for the first scheduled meeting of creditors. Bankruptcy Rules 4004 and 4007. Adjournment of the meeting of creditors does not affect the bar date. Failure to timely file a dischargeability adversary proceeding by the bar date will forever bar the creditor from objecting to discharge.