INFORMATION FOR CREDITORS
The Law Offices of Patrick M. Hunter does accept creditor work, although its primary emphasis has been on debtor representation. Our experience representing debtors makes us uniquely qualified to assist creditors when they encounter bankruptcy.
NOTE: FAMILY LAW OBLIGATIONS ARE SPECIAL OBLIGATIONS, USUALLY NOT DISCHARGABLE. AN EX-SPOUSE HAS VALUABLE RIGHTS THAT CAN BE LOST BY NOT DOING ANYTHING. IF YOU ARE AN EX-SPOUSE OF A DEBTOR, READ THE INFORMATION AT THE BOTTOM OF THIS PAGE AND CHECK OUT OUR SPECIAL TOPICS PAGE ON DIVORCE.
Creditor's rights in bankruptcy
When a creditor gets a notice of bankruptcy they must do three things immediately:
- Cease collection efforts,
- File a claim with the Court, and
- Evaluate their position and rights, and then act proactively within the bounds of the automatic stay and bankruptcy law.
CEASE COLLECTION EFFORTS
The Automatic Stay prohibits creditors from doing anything to collect their debts against either the debtor or property of the estate. Thus a creditor must immediately cease collection efforts, including telephone calls, billing, or lawsuits that might be pending against the debtor. If you are a secured creditor on a delinquent loan, you may be able to get an order from the Court allowing you to obtain the property. This depends in large part on the kind of bankruptcy that is pending and the amount of equity in the property.
FILE A CLAIM
A Proof of Claim must generally be filed if a creditor is going to be paid out of a bankruptcy estate. The claim must be supported by attaching copies of any contracts or judgments concerning your claim, or a summary of the claim if the supporting documents are voluminous to the proof of claim form. Usually, non-wage claims come low in the priority scheme, and receive little or nothing, but a claim should still be filed. A significant number of unsecured creditors do not file claims and will not be paid. Thus if you file a claim and payments do go to unsecured creditors, you may be paid a greater amount than originally thought. Get the Claim Form here if the court did not send one to you.
EVALUATE YOUR RIGHTS
When a creditor evaluates their rights they should include the following:
- What type of claim do I have?
- Part secured and part unsecured?
- Do I need to file something to secure my claim?
- Do I have a priority claim?
If you have a secured claim then you must consider whether or not to file a motion for relief from the stay. If the collateral is something that is consumed or rapidly deteriorates or depreciates, then an immediate motion probably should be filed to protect your interests in the property. If there is nominal or no equity in the property and you are receiving no payments then an immediate motion should be filed. Even if you are not granted the ability to proceed against the property you may be able to obtain “adequate protection payments from the debtor” to prevent an additional loss. These motions require the assistance of competent bankruptcy counsel, and usually a filing fee.
If you are in a unique position where you have not yet filed your UCC financing statements, you must take affirmative action or your claim will be an unsecured claim. Contact a qualified bankruptcy attorney as to your rights in such circumstances.
- Is my claim dischargeable?
- Family support obligations
- Obligations from divorce or family separation agreements, including the obligation of an ex to pay a debt that you may now have to pay
- A debt incurred because of false or misleading statements
- A result of drunk driving
- A result of a malicious act of the debtor
Consult a lawyer promptly if you believe your claim might fall in one or more of the above categories. In some cases you must file an action in the bankruptcy court to determine the dischargability of the debt or the debt will be discharged. The timelines are very short in bankruptcy, so DO NOT SIT ON YOUR RIGHTS. More about objections to discharge.
- Do I know something about the debtor that makes me believe that the debtors are not being honest with the bankruptcy court?
If you suspect that the documents filed with the court by the debtor are not accurate such as that assets have been concealed, transferred are greatly undervalued discuss this issue with your attorney as to your options. You may want to contact the trustee and provide any documents or facts that might help the trustee recover money for the estate, or challenge the debtor's right to a discharge, or you may want to proceed with a different option that will benefit you in particular as opposed to benefiting all creditors. This evaluation should be done before the first meeting of creditors since Creditors are entitled to question the debtor under oath about assets, liabilities, and financial history at the first meeting of creditors. Otherwise, you would need to obtain a separately scheduled examination under Rule 2004 of the Federal Rules of Bankruptcy Procedure
- Was I paid anything by the debtor within the year before filing?
The Bankruptcy Code permits a trustee or a debtor-in-possession to recover from creditors payments made shortly (90 days for non-insiders, one year for insiders such as family members) before the bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process. If the payments were regular, ordinary course of business payments or if the payments did not aggregate more than $600 of consumer debt payment during the 90 days before filing, then the payments are not preferences. If you are the recipient of a preference you are not required to do anything unless a demand for a turnover is sent to you by the trustee. If a demand is made, you should consult with competent bankruptcy counsel as to your options before doing anything.
I. As the case continues creditors should continue to monitor the case and take appropriate actions in Reorganization Cases.
Maintain a correct address. Make sure the court has your current address until the case is closed so that you get notice if there will be a dividend.
Monitor and object to the Debtor's plans. If the debtor is in a reorganization bankruptcy, read the proposed plan and understand your rights. In Chapter 11 plans, debtors frequently give creditors options, and if you do nothing you may be deemed to i) have accepted the plan, and ii) select an option, typically the one most advantageous to the debtor. Determine if you should appear and be heard by the court concerning the debtor's plan (in chapters 11, 12, and 13) and/or file a formal objection to the plan.
Consider reaffirmation agreements. If you are a secured creditor should you seek a reaffirmation agreement, or just accept the debtors' voluntary payments? As a creditor, you also have the right to ask the debtor to honor the debt even though it can be discharged. This is known as “reaffirming the debt.” Debtors are sometimes willing to agree to pay the debt when there is a cosigner or guarantor of the debt (such as a family member, friend, or employer) whom the debtor would prefer not to stick with the debt. A debtor may also wish to reaffirm a debt to avoid having a secured creditor take the collateral or as a precondition for agreeing to engage in business with you again.
Watch for dismissal. Some bankruptcies are dismissed for the debtor's failure to comply with the requirements of the bankruptcy code. When that happens, creditors may pursue collection as though the bankruptcy had not happened.
Relief from stay.
A bankruptcy filing automatically stays (stops) most actions against the debtor or the debtor's property such as foreclosures, lawsuits, or garnishments. The stay is designed to preserve the debtor's property and to give the debtor a break from litigation. The stay is neither absolute nor permanent.
When can a creditor get “relief” from that stay?
A creditor who is asking the court for relief from the stay to proceed against the debtor or his property must show the bankruptcy judge, after a hearing, that there is “cause” for the granting of relief. This may include showing that the creditor's interest in the particular property is not “adequately protected”, or showing that the debtor has no equity in the property and that the property is not needed for a reorganization. Relief from stay may also be granted to continue with a state court proceeding to determine status or rights, such as in a Divorce proceeding or a declaratory relief case, or in a case where the creditor is seeking to pursue insurance coverage only.
Relief actions are typically by secured creditors who want relief from stay to foreclose on real estate or to repossess a car. Creditors can usually get relief from the stay to foreclose on property in which the debtor has no equity or where the property is not insured. Where the equity cushion (the difference between the creditor's claim and the value of the property) is small or the property is rapidly deteriorating, the debtor may be required to pay “adequate protection” to the creditor to preserve the equity cushion for the creditor's benefit as a condition of the stay remaining in effect.
At times, creditors such as parties that have been injured because of alleged negligence want relief from stay to pursue the debtor's insurance coverage. Such relief is generally granted if the creditor agrees to limit the collection of his judgment to the insurance. Somewhat less common is a multi-party case where the plaintiff does not want to try the case without the debtor being a party (typically a defendant). Unless the debtor has insurance coverage or at least an insurance-provided defense, Courts are reluctant to grant relief in such cases. At times however, some judges will grant relief, with some restrictions on the creditor's rights against the debtor should the creditor get a judgment.
When relief from stay is granted, it does not remove the property from the estate or grant the creditor ownership of the property. It simply removes the stay restores the parties to their state law rights and permits the creditor to enforce those rights to the extent that the relief from stay order permits. Thus, if a mortgage holder gets relief from stay, it doesn't grant the creditor ownership of the collateral, it just frees the creditor to exercise whatever remedies the creditor had outside of bankruptcy.
To obtain relief from your stay, you must employ an attorney. The attorney will need information about the claim against the debtor, the debtor's property including information about the value of any collateral for the debt; and information about other liens or claims against the property. Relief from stay motions are generally heard on short notice (10-20 days); the court may grant relief at the initial hearing or set an evidentiary hearing to make a final decision.
DISCHARGABLITY OF DEBTS
Some kinds of claims against an individual debtor are automatically not dischargeable without the creditor having to do anything to protect the claim. Examples are child support, student loans, criminal restitution, and judgments arising from drunk driving. Other kinds of claims survive bankruptcy only if the creditor takes action in the short time allowed.
A creditor whose claim against the debtor was incurred by fraud, dishonesty, or other forms of intentional “bad acts” or which is a nonsupport claim that arose in a divorce may contest the discharge of his claim in a Chapter 7 bankruptcy by filing a timely suit and proving that the debt fits within the category of non-dischargeable debt. This is an adversary proceeding and it must be filed within 60 days of the first meeting of creditors. If it is not timely filed, the claim will be discharged. Since adversary actions in bankruptcy court can be expensive, you should consult with a competent bankruptcy attorney as to the cost of the suit, the chances of success, and the collectability of the debt if it is not discharged. If the debt is a consumer debt, there may also be adverse consequences if the suit is filed and the court allows the discharge. Ultimately the presumptions in dischargeability cases generally favor the discharge of the debt (except perhaps in the case of debts arising from divorce) so it is important to weigh this option carefully.
NOTE: Since corporations don't get a discharge of their debts in bankruptcy; the assets of the debtor corporation are simply liquidated to pay creditors. So, the concept of “nondischargeability” is meaningless in a corporate bankruptcy case.
Debts arising in divorce:
When a divorce or separation agreement or judgment creates an obligation in favor of the former spouse, most of these debts are not dischargeable in a Chapter 7 bankruptcy. In Chapter 13, however, support obligations to the former spouse may be discharged. An ex-spouse of a Chapter 13 debtor may be able to force a 60-month plan or obtain a preferred treatment in Chapter 13 if they act promptly.
The Bankruptcy Code permits a trustee or a debtor in possession to recover from creditors' payments made shortly before the bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process. These payments are called preferences. Preferences may also be a change in the status of a claim or the granting of a security interest for a previously unsecured claim.
The policy behind the statute is to diminish the advantages that a creditor might get by litigation or by aggressive collection actions that force the debtor into bankruptcy. That is accomplished by making payments received in the 90 days before the filing is recoverable in bankruptcy.
It is also the policy to discourage debtors from depleting assets before filing by paying family members or related business entities. This is achieved by making payments received by insiders in the one year before the filing is recoverable in bankruptcy.
While the preferential payments usually must be returned to the estate, the creditor who received the payments obtains a claim equal to the amounts returned. Thus they can have their fair share of the estate funds as opposed to an amount greater than others. The law of preferences is not intended to be punitive but rather an attempt to achieve equity between creditors.
If you get a demand for turnover of a preference or are sued, you should consult with competent bankruptcy counsel as to your rights. If the payments are ordinary course of business payments or contemporaneous exchanges, there may be a defense to the claim.