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2 common types of adversary proceedings in a business bankruptcy

On Behalf of | Jul 21, 2023 | Bankruptcy

One business’s financial challenges can have implications for numerous other organizations. For example, when a company falls behind on payments to lenders and creditors, those other businesses may begin to struggle because of those missed payments.

Although the bankruptcy process largely seeks to protect the business that files by granting an automatic stay, facilitating the restructuring process and discharging certain debts, the courts also recognize that creditors and lenders have rights as well. Sometimes, other parties with an interest in a bankruptcy will file what is essentially a lawsuit in the form of an adversary proceeding. There are many different types of claims that can arise as a secondary result of one business filing for bankruptcy, but two types of claims are among the most common reasons that adversary proceedings are initiated.

A request to lift the automatic stay

Collection activity typically halts as soon as a business files for bankruptcy. The requirement to continue waiting to pursue collection activity can be frustrating and financially harmful for other businesses. Companies that initiate adversary proceedings can request that the courts lift the automatic stay and allow them to repossess property or pursue a lawsuit against the organization with the bankruptcy still pending. Especially if the situation involved fraud or other forms of misconduct, the courts may agree that lifting the stay in relation to specific debts might be the appropriate response.

A request to exclude an account or debt

Creditors will receive notice when another business seeks to discharge a debt as part of a business bankruptcy. Those creditors do have the option of asking the courts to exclude their debt or account from the discharge. Scenarios where one business believes that the other organization engaged in fraud because there was never an intention to repay the debt might justify excluding it. Other times, it may be details included in the contract itself or special circumstances that warrant court review of the inclusion of the debt in the bankruptcy.

Adversary proceedings can significantly complicate business bankruptcies, which makes it important for both creditors and businesses thinking about filing to learn more about the process. Seeking legal guidance to better understand the rules that govern business bankruptcy will typically benefit executives at struggling organizations and those worried about receiving payment on existing debts alike.