Creditor & Bankruptcy FAQs

Examine all loan and security paperwork to confirm that they are comprehensive and that all necessary measures to perfect liens on any collateral supporting the obligation have been taken. If not, never take any action without first obtaining an order from the bankruptcy court.   This is a critical phase that determines the strength of a secured creditor’s position in the case. Section 506 explains how a secured claim’s value is determined. Although correcting inadequacies after the filing of the petition may be a violation of the automatic stay, it is critical to be aware of any issues. The secured creditor may have a period of time to perfect the creditor’s lien when the debtor gets possession of property or a transfer is made under Section 547(c)(3) and (e).

The secured creditor or landlord may ask the debtor to sign a new contract called a “reaffirmation agreement” or “assumption of lease” after the bankruptcy is filed but before the discharge is issued. This new contract has the same terms as the original, and Sections 524(c) and (k) describe the paperwork, disclosures, and procedures that the creditor must follow in order to get this new contract. It must be approved by the Court in order for the debtor to be bound by it. Because 524(k)(5)(B) requires the debtor’s attorney to certify that the debtor will be able to make the payments, it’s likely that no debtor’s counsel will sign the reaffirmation agreement. This is not only absurd, but it also begs the question of how anyone could certify someone’s ability to pay a future debt.

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

Look for a reason to object to a debt being discharged under Sections 523 or 727. Creditors have only 60 days from the date of the initial creditors’ meeting to initiate a complaint to have their debts declared non-dischargeable due to a misleading financial statement. A creditor’s chances of winning a non-dischargeable lawsuit are slim, and the creditor will almost always be denied attorney’s fees and expenses for filing the action.

Creditors will be notified of an initial meeting of creditors (Section 341, Meeting of Creditors) to be held by the bankruptcy trustee shortly after a bankruptcy is filed. You are welcome to attend the Section 341, Creditors’ Meeting, but it is not compulsory. This meeting allows the creditor to ask the debtor a few questions about the creditor’s claim, collateral, other claims against the debtor, the debtor’s plans for its bankruptcy case, and other financial matters. Time if short, so I t is not appropriate to interrogate the Debtor at this time (check out 2004 examinations). This is an excellent moment to inform the Trustee (the person in charge of the meeting) of any inconsistencies detected in the schedules by the creditor. Make sure you can back up any claims you make. The meeting might be attended by either the creditor or its counsel.

An order granting a Motion for Relief from the Automatic Stay, often known as a “stay order,” is obtained by filing a Motion, Notice, and Certificate of Mailing with the court, as well as notifying the appropriate parties. The Debtor is given the opportunity to respond. A hearing will be conducted if a response is filed. An Order, Certificate of No Objection, must be submitted with the Court if no response is filed. The Order will most likely be signed by the Court. The creditor is free to proceed with the action requested in the Motion and granted in the Order once the signed order is received.

When a bankruptcy petition is filed, a federal restraining order known as the automatic stay prevents any creditor, collection agency, or government institution from pursuing trustee sales, foreclosures, garnishments, lawsuits, or repossessions against the debtor and his or her property. Attempting to collect money, evict the renter, garnish wages, or execute a trustee’s sale, foreclosure, or repossession without first receiving authorization from the bankruptcy court is a violation of the federal restraining order. An Order for Relief from the Automatic Stay is the name for this type of authority. Ignoring  the automatic stay can result in a hefty penalty.

The Bankruptcy Code was changed in 2005 to help people who are owed child support or alimony/maintenance (sometimes known as “domestic support obligations” or “DSO”). The collection of any DSOs from property that is not the estate’s property is not automatically stayed 362(b)(2)(B). In addition, Section 522(c)(1) make it obvious that the debtor’s whole estate might be liquidated to satisfy DSO obligation. The Bankruptcy Trustee has responsibilities to the DSO claimant as well. Section 704(c).

When a bankruptcy is filed that includes a loan on real estate, then the automatic stay usually stops the ability of the lender to complete their foreclosure or trustee’s sale.  It is advisable that you talk with an experienced bankruptcy attorney to find out the next steps.  Normally, a Motion for Relief from the Automatic Stay should be filed early in the case if a creditor wants its collateral fully removed from the bankruptcy, forcing the debtor to deal with the matter head on. On “lift stay” motions, a hearing is usually scheduled in around 30 days. The creditor is unable to complete their trustee’s sale or foreclosure without an order lifting the stay.

• (1) Residential real estate or personal property: Chapter 7 — The debtor/trustee has 60 days to assume or reject the lease after filing the bankruptcy. Rents must be brought current if the lease is accepted. Section 365 (2)(p)  If a lease is not assumed within 60 days, it is immediately considered rejected. Sadly, even when the lease has expired, the landlord is still unable to take action against the debtor or his personal property without first filing an motion for relief. As a result, it’s a good idea to file a motion for relief as soon as the debtor files for bankruptcy in a lease. Chapter 11, 12, or 13 – the trustee/debtor has the option to assume or reject the lease at any point until the Plan is confirmed.
• (2) Non-residential real property – trustee must assume within 120 days of filing bankruptcy or order confirming Plan; court can extend for another 90 days. Section 365(d) (4). Previously assume lease, then refused – potential administrative claim, see 503(b)(5).

There is no automatic stay under Section 362(b)(22):

• if the landlord obtained a judgment for possession of residential property prior to the bankruptcy filing.
• If the debtor had a prior bankruptcy (7, 1 or 13) ongoing in the previous 12 months, Section 362(c)(3)(A) states that the automatic stay on any lease may be lifted 30 days after filing the bankruptcy.
• If the debtor has filed two or more cases in the last 12 months, there is no automatic stay.

Be cautious: this is a new law that could “bite the landlord in the arse.” I strongly advise speaking with an experienced creditor attorney .

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

• f of claim). Unless the debtor expressly objects, the creditor’s proof of claim shall be deemed to be accurate.
• Proofs of claim are not required to be filed in a Chapter 7 no-asset case. A distribution of funds to unsecured creditors will not be made. A no-asset case is one in which the Debtor’s whole estate is protected by law (exempt property). No-asset cases account for the vast majority of Chapter 7 cases involving individuals.
• A creditor must file a proof of claim in all other Chapter 7 and Chapter 13 cases in order to participate in any distribution.
• If the claim is accurately listed in the schedules and is not scheduled as disputed, contingent, or unliquidated, a proof of claim is not necessary in a Chapter 11 case.

In most cases, in order for the automatic stay’s full restraining action to take effect, Section 342 requires that all creditors be notified of the bankruptcy. The debtor must identify all addresses provided by the creditor in the 90 days leading up to the bankruptcy filing, as well as any additional addresses used by the creditor in a prior bankruptcy. Section 342(c)   If a creditor receives notice of bankruptcy, they must immediately halt all attempts to contact the debtor or collect property without first seeking authorization from the bankruptcy court. Ignoring this ban carries a monetary penalty. Sections 343(g) and 362(k) of the Bankruptcy Code.

Your name and debt have been added to the list. This should be done at the Bankruptcy Court where the case was originally filed. A creditor should review the debtor’s schedules to determine whether the creditor’s claim (what the creditor owes) was properly designated as secured or unsecured and listed in the correct amount. It’s also important to note whether the debtor disputes the claim or labels it as unliquidated or contingent. If a claim isn’t listed on the debtor’s schedules, the creditor should consult an expert creditor attorney right away. The creditor will probably be instructed that he or she must file a proof of claim before the court deadline, or the claim will be denied, and the creditor will not get any monies if a distribution is to be made.

The secured creditor or landlord may ask the debtor to sign a new contract called a “reaffirmation agreement” or “lease assumption agreement” after the bankruptcy is filed but before the discharge is issued. This new contract has the same terms as the original, and Sections 524(c) and (k) outline the paperwork, disclosures, and procedures that the creditor must follow in order to get this new contract. It must be approved by the Court in order for the debtor to be bound by it.

Because 524(k)(5)(B) requires the debtor’s attorney to certify that the debtor will be able to make the payments, it’s likely that no debtor’s counsel will sign the reaffirmation agreement. This is not only absurd, but it also begs the question of how anyone could certify someone’s ability to pay a future debt.

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

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.

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.

When a bankruptcy petition is filed, a federal restraining order known as the automatic stay prevents any creditor, collection agency, or government institution from pursuing trustee sales, foreclosures, garnishments, lawsuits, or repossessions against the debtor and his or her property. Attempting to collect money, evict the renter, garnish wages, or execute a trustee’s sale, foreclosure, or repossession without first receiving authorization from the bankruptcy court is a violation of the federal restraining order. An Order for Relief from the Automatic Stay is the name for this type of authority. Disobedience to the automatic stay can result in a hefty fine.

To ensure that you receive notices, obtain a copy of the debtor’s bankruptcy schedules or check with the clerk’s office to confirm that your name and debt have been recorded. This should be done at the Bankruptcy Court where the case was originally filed. A creditor should examine the debtor’s schedules to see if the creditor’s claim (what the creditor owes) was properly designated as secured or unsecured and listed in the correct amount. It’s also worth noting if the debtor contests the claim or labels it as unliquidated or contingent. If a debt was not stated on the debtor’s schedules, the creditor should immediately talk to a creditor bankruptcy attorney.  It may be necessary to file a proof of claim by the deadline.

• 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.

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).