If you’re going through bankruptcy or thinking about filing, you may have heard the term “bankruptcy litigation.” While it can sound intimidating, understanding how it differs from the regular bankruptcy process can help you feel more prepared.
In a regular bankruptcy process, the focus is on addressing your debts and moving toward a fresh start. You file a bankruptcy petition, submit your financial information, and your creditors review it. If there are no major issues, your case proceeds, and eventually, your debts are discharged. This process is designed to be straightforward, with the goal of providing debt relief and helping you regain control of your finances.
Bankruptcy litigation, on the other hand, comes into play when there’s a dispute—usually from a creditor, the bankruptcy trustee, or the U.S. Trustee’s office.
For example, a creditor might believe you were dishonest about your finances or claim that a particular debt shouldn’t be discharged, perhaps because of alleged fraud or misrepresentation. Litigation can also arise if the trustee suspects you weren’t fully transparent about your assets.
Litigation often happens in the form of an adversary proceeding, which essentially follows the steps of a lawsuit: filing complaints, serving papers, gathering evidence, and possibly going to trial if a settlement isn’t reached.
Most people go through the regular bankruptcy process without facing any legal challenges. However, if a dispute does arise, it’s crucial to handle it properly. For example, if a creditor believes you misrepresented your financial situation when taking out a loan or incurring debt, they may file a complaint asking the court not to discharge that specific debt.
Similarly, the trustee might raise concerns if they believe you failed to report or undervalued assets in your filing. In both cases, your attorney will help defend your position and work to resolve the issue.
Most often, bankruptcy litigation happens when there’s a belief that something wasn’t fully disclosed or when creditors feel they’ve been wronged. While litigation doesn’t occur in every bankruptcy case, it’s important to understand the common issues that can trigger it—and how to avoid them.
One of the most common reasons for bankruptcy litigation is a failure to fully disclose assets, debts, or financial transactions. When filing for bankruptcy, you’re required to provide a complete picture of your financial situation. This includes listing all of your assets, any transfers of property, and payments made to creditors. If something is left out—whether by accident or on purpose—it can raise red flags.
For example, if you didn’t disclose a recent transfer of property or payments to family members (referred to as “insiders”) within a specific time frame before filing, the bankruptcy trustee may view this as an attempt to hide your assets. This could lead to an adversary proceeding, where the trustee or a creditor files a complaint to challenge your discharge.
Another common issue is failing to report payments or transfers made within the 90 days before filing for bankruptcy, or payments made to insiders (family or friends) within two years before filing.
These types of payments can be problematic because they might be viewed as preferential treatment—essentially paying certain debts or transferring property to avoid losing them in bankruptcy. The trustee has the right to recover those payments or assets to ensure they’re distributed fairly among all creditors.
If you don’t disclose these transactions in your bankruptcy paperwork, it could lead to litigation in the form of a trustee seeking to reverse the transfer or payment, or even challenging your discharge for dishonesty.
Creditors may also file complaints if they believe you committed fraud or misrepresented your financial situation when you incurred debt. For example, if you took out a loan or applied for credit and provided false information about your income or assets, that creditor could challenge your ability to discharge the debt.
In one case, a debtor applied for credit at a casino, claiming to make $10,000 a month when their actual income was only $1,000. When the bankruptcy was filed, the casino challenged the discharge of that debt, arguing that the debtor had lied to obtain the credit. This led to an adversary proceeding, with the creditor claiming fraud.
In some cases, creditors may accuse a debtor of embezzlement, larceny, or other fraudulent acts. While these terms have specific meanings in criminal or civil courts, they take on a slightly different meaning in bankruptcy cases.
A creditor might allege that certain debts should not be discharged due to willful or malicious actions, such as deliberately misappropriating funds or property. These cases are typically more difficult for creditors to win but are taken seriously by the courts when they arise.
If you’re facing bankruptcy litigation, it’s important to know the steps involved so you can approach the situation calmly and effectively. Here’s a clear breakdown of the key steps:
Step One: Work With The Right Attorney
The first and most crucial step is making sure you’re working with an attorney who understands both bankruptcy and litigation.
Many bankruptcy attorneys handle routine filings but may not have experience with contested motions, hearings, or trials. If your case involves litigation, ensure your attorney is comfortable with courtroom processes.
Step Two: Understand The Accusations
The next step is to carefully review what you’re being accused of. Litigation complaints can be overwhelming because they often list multiple allegations, making the situation seem worse than it is.
It’s important not to panic. Read through the complaint, but if it feels confusing or alarming, take a step back and consult with your attorney. They can help clarify what’s being alleged and whether the accusations hold any truth.
Step Three: Assess The Facts
Once you understand the accusations, assess the facts. Are the claims in the complaint true, or are they based on misunderstandings or errors? Discuss your side of the story with your attorney.
Bankruptcy litigation often involves complex issues, such as whether fraud or misrepresentation occurred, but the definitions of these terms in bankruptcy law can differ from state or civil law. Your attorney will help you figure out whether there is a solid defense.
Attorney Penny Bach is a seasoned lawyer based in Illinois who has helped countless clients just like you navigate the intricacies of bankruptcy law. With nearly two decades of experience, she is prepared to assist you in restructuring your financial situation so that you can regain control and focus on what truly matters.
Still have questions? Ready to get started? Contact Bach Law Firm today to schedule an initial consultation.
Step Four: Decide On Your Strategy
After analyzing the facts, you’ll need to decide how to proceed. Your attorney will guide you through your options, which may include:
If the allegations are unfounded, your best approach might be to contest them in court.
In some instances, it may be more cost-effective to settle, especially if fighting the case could become expensive.
Sometimes, a mix of negotiation and legal defense is the best way forward. Your attorney will help you weigh the costs and benefits of each option.
Step Five: Perform An Honest Cost-Benefit Analysis
One important step in deciding how to handle the litigation is doing a cost-benefit analysis. Sometimes, defending a case may cost more than settling it. Your attorney will help you evaluate the potential financial impact and guide you toward the most practical resolution.
It’s also important to note that, in some cases, debtors can also initiate bankruptcy litigation by filing adversary complaints against creditors.
This usually occurs when creditors violate the automatic stay (which prohibits collection efforts during bankruptcy) or the discharge injunction (which stops creditors from pursuing debts that have been discharged). If you’re in this position, the process is similar—you’ll work with your attorney to file the complaint and present your case.
Minimizing the cost of bankruptcy litigation starts with being completely open and honest with your attorney from the beginning.
Here’s how you can keep expenses in check while navigating this complex process:
Full Disclosure
The more accurate and complete the information you provide to your attorney, the better they can assess your case. Attorney-client privilege protects your conversations, so be transparent—even if the situation is difficult. This allows your attorney to build a realistic strategy and avoid unnecessary legal battles.
Assess The Strength Of Your Case
Once you provide all the details, your attorney can evaluate the strength of the claims against you. In some cases, the complaint may be weak or poorly drafted, and your attorney might advise fighting it based on those grounds. In other cases, if the evidence against you is strong, settling early may be the most cost-effective option.
Start With A Conversation
When faced with a complaint, one of the first things an experienced attorney will do is contact the opposing party, often the trustee or creditor. The goal is to understand what they really want and explore the possibility of a settlement. Settling early, before the case escalates into a full legal battle, can significantly reduce costs.
Set Clear Limits
You and your attorney should agree on a strategy that fits your financial situation. For example, you might decide to fight the case until a certain point—like after discovery or initial negotiations—and then explore settlement options. This approach keeps you in control of both your legal expenses and the direction of the case.
Negotiate Where Possible
In many cases, negotiation can lead to a resolution that avoids lengthy and costly litigation. Your attorney may be able to negotiate a favorable settlement with the trustee or creditor early on, saving you the expense of drawn-out legal proceedings.
Bankruptcy litigation can carry significant risks, depending on the nature of the case and the specific issues being litigated:
Losing The Case
If you’re on the defense and lose the case, you could face severe consequences. For example, if the litigation is about your general discharge, you could lose the ability to discharge your debts in bankruptcy altogether. This would leave you with debts but without the protection of bankruptcy, and you may still lose your assets.
A Specific Debt Is Not Discharged
If the litigation is about the dischargeability of a specific debt (e.g., a creditor argues that their particular debt should not be wiped out), losing the case means that debt survives the bankruptcy. If it’s a small amount, this might not be a huge problem, but if it’s a large debt, it could undermine the purpose of your bankruptcy filing.
You Are Criminally Prosecuted
In the most serious cases, especially if the U.S. Trustee’s Office believes there’s fraud or intentional misconduct, the case could be referred for criminal prosecution and potentially result in jail time or fines.
If there’s even a slight chance of criminal implications, your attorney should advise you to consult with a criminal attorney who specializes in federal law to protect you from any potential charges.
You Spend Too Much Defending The Case
Even if the case doesn’t lead to criminal charges, litigation is costly. You could spend considerable resources defending yourself, only to still owe debts after the process concludes, which would defeat the purpose of bankruptcy.
When it comes to referring clients for criminal proceedings, I don’t work within a formal referral network, but I do have a few trusted criminal attorneys that I turn to when needed.
Over the years, I’ve built connections with lawyers I went to law school with, or those I’ve developed personal relationships with through other channels, like my synagogue. I’ve referred family members to these attorneys for smaller matters, like traffic tickets, and they’ve always done a good job.
In any case, when I refer a client to another attorney, I do so carefully because I recognize that clients often trust my recommendation completely. I always make it clear if I haven’t personally worked with a lawyer but know of their reputation.
I also encourage clients to trust their instincts—if something feels off during their consultation, I remind them there are many qualified attorneys in the Chicago area and they shouldn’t hesitate to find someone they’re comfortable with.
This applies not only to criminal law but to any legal issue that may arise during a bankruptcy case—whether it’s securities fraud, divorce, workers’ compensation, or employment issues. Every field of law can intersect with bankruptcy, and I know my limitations.
For example, in a case where securities fraud became a concern, I sought the advice of a securities expert to ensure that the steps I was taking in bankruptcy wouldn’t expose my client to further legal risk.
At the end of the day, I realize that my legal practice isn’t about me – it’s about you. By consulting with professionals in other areas when needed, I can better protect my clients and ensure the best possible outcomes in complex cases.
What Drives Me To Help People Like You
Both my spouse and I didn’t initially plan to specialize in bankruptcy litigation—we more or less fell into it. Early in my career, I handled a lot of litigation in state court, which gave me a strong background in courtroom procedures and case strategy. That experience naturally transitioned into bankruptcy litigation, where there’s often a need for strong litigators to handle disputes.
Over time, we started doing more creditor work, and I was continually surprised by what some debtor attorneys were getting wrong or overlooking. For example, I’ve seen attorneys fill out asset values on their client’s bankruptcy schedules without checking the facts – and this can lead to severe consequences for clients.
In one case, I saw a client nearly lose two homes because their attorney didn’t check property records. In another instance, a client lost $400,000 in equity because their attorney didn’t fight the trustee on a legal principle that was completely wrong.
What drives me in this area of law is simple: some people are getting hurt because of their lawyers. I’m passionate about protecting clients from those errors and making sure they don’t suffer because their attorney didn’t take the time to understand the intricacies of bankruptcy law.
Ultimately, what’s most fulfilling for me is knowing that we’re making a real difference in people’s lives. Whether it’s saving someone’s home or protecting them from financial ruin, bankruptcy litigation allows me to step in and fix the mistakes that could otherwise devastate individuals and families.
Still Have Questions? Ready To Get Started?
For more information on Bankruptcy Law In Illinois, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (847) 440-5998 today.
Attorney Penny Bach is a seasoned lawyer based in Illinois who has helped countless clients just like you navigate the intricacies of bankruptcy law. With nearly two decades of experience, she is prepared to assist you in restructuring your financial situation so that you can regain control and focus on what truly matters.
Still have questions? Ready to get started? Contact Bach Law Firm today to schedule an initial consultation.
