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It is very important that you obtain legal advice from an experienced attorney regarding your particular situation. Consultation before you take action will certainly cost you less than it will cost to fix your unintentional errors.

CREDITOR RIGHTS IN BANKRUPTCY

“Creditor’s Rights” is a legal term used to describe a lawyer’s area of practice which is focused on the collection of debts on behalf of creditors.  If a bankruptcy is filed there are powerful tools in the Bankruptcy Code to assist a creditor and protect their rights.

Attorneys who practice in the area of creditor’s rights will perform one or all of the following:

  • File lawsuits and use other legal collection techniques to collect consumer debts (i.e. debts owed by individuals).
  • File lawsuits and use other legal collection techniques to collect commercial debts (i.e. debts owed by businesses).
  • Represent a creditor’s interests in a bankruptcy proceeding.
  • Conduct a foreclosure or trustee’s sale of real estate if the purchaser defaults on payment.
  • Recovery of secured goods (e.g. automobiles) if the purchaser defaults on payment.
  • Garnish wages or bank accounts as necessary.
  • Conduct a sheriff’s sale of non-exempt property.
  • Pursue other remedies available under the contract and the law.

Attorneys bill by the hour or may quote a flat fee.  Normally fees and costs depend on:

  • The type of bankruptcy (chapters 7, 11 or 13);
  • What you want to accomplish;
  • How much the borrower will fight what you want to accomplish.

GENERAL QUESTIONS FOR CREDITORS.

Click on each question and it will expand to show the answer.

Obtain a copy of the debtor’s bankruptcy schedules or check with the clerk’s office to verify that your name and debt has been listed to ensure receipt of notices. This should be done at the Bankruptcy Court where the case was filed. A creditor should review the schedules filed by the debtor, noting whether the creditor’s claim (what is owing to the creditor) was properly designated as secured or unsecured and listed in the accurate amount. It should also be noted whether the debtor disputes the claim or lists it as unliquidated or contingent. Any errors can be rectified by filing a proof of claim, if a claim was not listed on the debtor’s schedules, the creditor must file a proof of claim by the court deadline or the claim will be disallowed and the creditor will not receive any monies if there is to be a distribution of funds.

Section 342 requires that all creditors receive notice of the bankruptcy in order for the full restraining action of the automatic stay to become effective. The debtor is to list all addresses provided by the creditor within the 90 days before the bankruptcy was filed, and/or any other address used by the creditor in another bankruptcy. Section 342(c) Again, this is new law and I would not advise the creditor to ignore any notice, written or otherwise. Once the creditor receives notice of the bankruptcy they must cease all attempts to contact the debtor or seize property, without obtain permission from the bankruptcy Court. There are monetary penalty for ignoring this prohibition. Section 343(g) and 362(k).

  • File a proof of claim. It is the creditor’s proof of claim that will govern unless specifically objected to by the debtor.
  • In a Chapter 7 no-asset case, proofs of claim need not be filed. There will not be any distribution of funds to any unsecured creditors. A no-asset is a case where all the assets of the Debtor were protected by law (exempt property). The majority of all chapter 7 cases involving individuals are no-asset cases.
  • In all other Chapter 7 cases and Chapter 13 cases, a creditor must always file a proof of claim to participate in any distribution.
  • In a Chapter 11 case a proof of claim is not required if the claim is accurately listed in the schedules and is not scheduled as disputed, contingent or unliquidated.

If a creditor wants its collateral out of the bankruptcy completely a Motion for Relief from the Automatic Stay should be filed early in the case, forcing the debtor to deal with the problem head on. Normally a hearing is scheduled in approximately 30 days on “lift stay” motions. Without an Order lifting the stay the creditor is prohibited from completing their trustee’s sale or foreclosure.

  • (1) Residential real property or personal property: Chapter 7 – The debtor/trustee has 60 days from filing the bankruptcy to either accept or reject the lease. If the lease is accepted then rents must be brought current. Section 365(p(2) If the lease is not accepted within within the 60 days then it is automatically deemed rejected. Unfortunately, despite the fact that the lease has expired the landlord still cannot take any action against the debtor or his personal property without filing a motion for relief. Therefore, it is wise in a lease to file a motion for relief immediately upon the debtor filing their bankruptcy. Chapter 11, 12 or 13 – trustee/debtor may assume or reject lease at any time before the confirmation of the Plan Section 365(d)(2) and 365(p)(3)
  • (2) Non-residential real property – trustee must assume within 120 days of the filing of the bankruptcy or order confirming Plan, court can extend for additional 90 days. Section 365(d)(4). See 503(b)(5) previously assume lease, then rejected – possible administrative claim.

Section 362(b)(22) indicates that there is no automatic stay, so long as the landlord obtained a judgment for possession of residential property prior to the filing of the bankruptcy.
Section 362(c)(3)(A) indicates that the automatic stay may terminate 30 days after filing the bankruptcy with respect to any lease, if that debtor had a prior bankruptcy (7, 1 or 13) pending in the last 12 months.
Section 362(c)(4)(A)(i) No automatic stay if debtor filed two or more cases in last 12 months.
Beware – this is new law and may “bite the landlord in the a_ _”. Until the law is settled I highly recommend obtaining a comfort order as described in 362(j).

The landlord may not use the filing of a bankruptcy as grounds for terminating a least 365(e)(1)
Trustee may assign the lease, despite non-assignment clauses Section 365(f).

The 2005 changes to the Bankruptcy Code greatly favor anyone owed child support or alimony/maintenance (called “domestic support obligations” or “DSO”). There is no automatic stay on the collection of any DSOs from property that is not property of the estate 362(b)(2)(B). Also, the legislative history of the new law and Section Section 522(c)(1) makes it clear that all property owned by the debtor can be liquidated to pay DSO debt. The Bankruptcy Trustee even has obligations to the DSO claimant. Section 704(c).

When a bankruptcy is filed a federal restraining order called the automatic stay immediately stops any trustee sales, foreclosures, garnishments, lawsuits or repossessions against the debtor and the debtor’s property by any creditor, collection agency, or government entity. It is contempt of this federal restraining order to attempt to collect money, evict the tenant, garnish wages or complete a trustee’s sale, foreclosure or repossession without first obtaining permission from the bankruptcy court. This permission is called an Order for relief from the automatic stay. Contempt of the automatic stay can be punishable by a very large fine.

A Motion for Relief from the automatic stay or a “stay order” is obtained by first filing a Motion, Notice and Certificate of mailing with the court and noticing the proper parties. The Debtor has an opportunity to file a response. If a response is filed a hearing will be held. If no response is filed an Order, Certificate of No Objection must be filed with the Court. The Court will most likely sign the Order. Once the signed order is received the creditor is free to proceed with the action that they requested in the Motion and that was granted in the Order.

Carefully check all of the loan and security documents to ensure that they are complete and that all necessary steps have been taken to perfect liens on any collateral securing the obligation. This step is extremely important and will determine the strength of a secured creditor’s position in the case. Section 506 describes how the value of a secured claim is determined. Although curing deficiencies post-petition may be a violation of the automatic stay, nevertheless it is essential to be aware of any problems. Section 547(c)(3) & (e) gives the secured creditor no more than 30 days after the debtor receives possession of property or transfer is made to perfect the creditor’s lien.

Shortly after a bankruptcy is filed, creditors will receive notice of an initial meeting of creditors (Section 341, Meeting of Creditors) to be held at the Office of the United States Trustee. You may attend the Section 341, Meeting of Creditors, but are not required. This meeting provides the creditor a opportunity to ask the debtor a few questions regarding its claim, its collateral, other claims against the debtor, the debtor’s plans for its bankruptcy case and any other aspects of its financial affairs. This is not an opportunity to interrogate the Debtor. This is a good time to reveal to the Trustee (the person conducting the meeting) any inconsistencies the creditor has discovered in the schedules. Make sure to be able to support any statements. Either the creditor or its counsel can attend the meeting.

You can ask the debtor questions at the creditors meeting (see above), or Bankruptcy Rule 2004 permits a creditor to take the deposition of the debtor and inquire into all aspects of its financial affairs. The scope of the examination is broad and should be taken advantage of to obtain information.

Look for a basis to object to the discharge of a particular debt under Sections 523 or 727. Creditors have only 60 days from the date of the initial meeting of creditors to file suit to declare their debts non-dischargeable on the basis of a false financial statement. It is very difficult for a creditor to win a non-dischargeable case and normally the creditor will not receive its attorney’s fees/costs for bringing the action.

After a bankruptcy is filed, but before the discharge is entered, the secured creditor, or landlord, could request the debtor sign a new contract “reaffirmation agreement”. This new contract has the exact terms as the original, Section 524(c) and (k) delineates several documents, disclosures and procedures that must be followed by the creditor in obtaining this new contract. It must be approved by the Court in order to be binding on the debtor. It is most likely no debtor’s attorney will sign the reaffirmation agreement because 524(k)(5)(B) requires that the debtor’s attorney certify that the debtor will be able to make the payments. This is not only ludicrous, but how could anyone certified anyone’s ability to pay a future debt. This is also new law and few, if any, creditors will be able to follow the complicated procedures.

Below is a link to a video of Bankruptcy Judge Eileen W. Hollowell, filmed explaining the reaffirmation process.

http://www.azb.uscourts.gov/video-discussion-reaffirmation