What is Bankruptcy Litigation: A Guide

What is Bankruptcy Litigation
Bankruptcy Litigation. Source (Reddit)

spute Bankruptcy is often seen as a straightforward process without disputes.

However, occasionally, ‘interested parties’ like creditors, debtors, and trustees may engage in litigation.

Bankruptcy litigation is a legal process that involves disputes arising from bankruptcy cases.

Individuals or entities who are unable to pay their debts file bankruptcy cases to seek relief from their creditors.


Types of Bankruptcy Litigation

Here are some common types of disputes that occur in a bankruptcy case.

Dispute Between Debtor and Creditors
  • Debts’ Dischargeability: Disputes over whether certain debts can be discharged.
  • General Discharge Challenge: Creditors contesting the debtor’s right to a full discharge due to fraud.
  • Claims: Debtor challenges a creditor’s proof of claim.
  • Violations of Automatic Stay or Discharge Injunction: Debtor sues creditors for attempting to collect in violation of court orders.

Between Debtor and Trustee

  • General Discharge Challenge: Trustee disputes debtor’s discharge, often due to alleged bankruptcy fraud.
  • Exemptions and Property Issues: Litigation regarding the debtor’s right to claim exemptions and the trustee’s right to seize exempt property.

Between Trustee and Creditors or Other Interested Parties

  • Trustee’s Strong-Arm Powers: Trustee’s authority to reclaim assets, such as preferential payments or fraudulently transferred property.
  • Claims: Trustee challenges creditors’ proof of claim.

How the Bankruptcy Court Distinguishes the Different Types of Litigation

Bankruptcy rules categorize litigation based on its relevance to bankruptcy, influencing the judge’s authority.

  1. Core Matters: Pertaining directly to bankruptcy, decided by the bankruptcy court.
  2. Non-Core Issues: Relevant to bankruptcy but could exist outside it, referred to federal district court unless parties agree otherwise.
  3. Adversary Proceedings: Separate cases with distinct rules, often plaintiff vs. defendant format.
  4. Controversial Issues: Specific bankruptcy matters, not full-fledged litigation, e.g., objections to proof of claims, Chapter 11 or 13 plan objections, or motions to lift the automatic stay.
  5. Jurisdiction Expansion: Bankruptcy courts can handle various lawsuits involving debtor’s assets or debts and may override state court decisions in some cases.

However, bankruptcy courts typically avoid:

  • Divorce or Child Custody Cases: They don’t dissolve marriages or decide parenting rights.
  • Probate Matters: Mostly handle asset disposal and debt repayment, not transfers of ownership.
  • Personal Injury Liability: Usually defer to state courts for fault determination but handle insurance coverage and fraud-related issues.