What Is Bankruptcy Litigation?

Most people view of bankruptcy as a simple procedure that, unlike many court proceedings, does not involve a third party. You can file paperwork and get a discharge (a court order that eliminates eligible debt) without fear of someone objecting to your case.

That is how it works in the great majority of cases. Although every creditor in a bankruptcy case has the right to oppose the discharge, few do so, partly because they don’t always have grounds to do so. However, individuals concerned (known as “interested parties,” such as the debtor, creditors, and trustee) still have the option of engaging in full-fledged litigation. You’ll learn how normal bankruptcy litigation works in this post.

How the Bankruptcy Court Distinguishes the Different Types of Litigation

The bankruptcy rules discriminate between different types of litigation based on how they relate to the bankruptcy. The distinction is significant because it impacts the bankruptcy judge’s jurisdiction and decision-making authority.

It’s all about the fundamentals. Litigation over a debtor’s right to maintain property covered by a bankruptcy exemption, for example, is specific to bankruptcy cases. The bankruptcy court has the last say on these matters (subject to appeals).

Non-core issues are important. These issues are relevant to a bankruptcy case, but they could have arisen between the parties even if a bankruptcy case had not been filed. Contract disputes and tax litigation are two examples. In a non-core matter, a bankruptcy judge’s authority or jurisdiction is restricted to making a referral to the federal district court (of which the bankruptcy court is a part) unless all parties agree to give the bankruptcy judge final authority.

Although all bankruptcy disputes are serious concerns, some are more complicated than others and necessitate the use of unique litigation rules.

Adversaries. Some bankruptcy litigation must be filed as a separate case known as an adversary process. These cases are linked to the main case, but they have their own case number and follow a different set of regulations than the main case. They usually take the traditional plaintiff vs. defendant format and proceed in the same way as previous trials.

Controversial issues. These are issues that normally do not escalate to full-fledged litigation (though they can) and often deal with a specific issue in the bankruptcy case. Objections to proof of claims (discussed further below), objections to Chapter 11 or Chapter 13 plans, and motions to lift the automatic stay are all examples.

In a bankruptcy case, not all of the litigation stems from the bankruptcy itself. Almost any lawsuit in which a debtor is involved can be brought in bankruptcy court, especially if it involves the debtor’s money or property. Depending on the nature of the suit and its status in the nonbankruptcy court, a case pending in another court can be transferred to the bankruptcy court. If the case is not removed to bankruptcy court, the bankruptcy judge can maintain jurisdiction to have the last (or almost final) word over a state court decision.

Although there isn’t much that a bankruptcy judge won’t take on, the following issues aren’t frequently decided in bankruptcy court:

Cases involving divorce or child custody. Property divides and ownership issues, as well as responsibility for a secured obligation (a debt secured by collateral, such as a house or car), may be brought before a bankruptcy judge, however bankruptcy judges will not dissolve marriages or determine parenting rights.

Probate is important. Although a debtor’s death does not automatically conclude a bankruptcy case, the bankruptcy court typically only deals with matters of asset disposal and debt repayment. It would be unusual for the court to take on a case involving a transfer of ownership or other concerns that are typically handled by the probate court.

Personal injury is a serious concern. In most cases, bankruptcy courts will defer to state courts when it comes to determining liability (the job of deciding who is at fault in an accident). Insurance coverage cases are frequently heard in bankruptcy courts, and they are frequently asked to determine if a state court judgment was obtained owing to fraud, willful damage, or intoxication, all of which can preclude the debt from being dismissed.

Bankruptcy Litigation Types

The following are some of the most prevalent sorts of disagreements that arise in bankruptcy cases.

Debtor and Creditor Relationship

Debt dischargeability is a term used to describe the ability of a debt to be discharged Some debts are non-dischargeable (that is, they do not disappear when you file for bankruptcy). However, in other cases, the debtor or creditor must file a lawsuit inside the bankruptcy case, requesting that the court rule whether the debt will be discharged.

Discharge of all charges. If the debtor has cheated the creditor or the court, the creditor might contest the debtor’s right to the complete discharge.

Claims. On a proof of claim, debtors might contest a creditor’s right to payment (the form a creditor must submit before receiving payment).

Violations of automatic stay or discharge injunctions. A debtor can sue a creditor if the creditor tries to collect a debt while the automatic stay or discharge injunction is in effect. (A court order prohibiting a creditor from collecting following a bankruptcy filing is known as the automatic stay.)

The Debtor and the Trustee

Discharge of all charges. The trustee, like a creditor, can oppose a debtor’s right to a discharge. It frequently happens as a result of a charge of bankruptcy fraud.

Exemptions and other property issues: The trustee has the authority to challenge the debtor’s right to an exemption (a debtor can protect property that is exempt under the law). The debtor, on the other hand, has the right to oppose to the trustee’s right to seize the debtor’s exempt property.

Between the Trustee and the Creditors or Other Parties Involved

Powers of coercion wielded by the trustee. The trustee has broad authority to seize assets. The trustee, for example, can retrieve preferential payments (money paid to a certain creditor just before the bankruptcy filing) or property that was fraudulently transferred to someone else to avoid the trustee selling it.

Claims.

On a proof of claim, the trustee can contest a creditor’s right to payment.