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Creditor's Response to Straight Bankruptcy

 

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PT Chapter 11

CREDITOR RESPONSES

TO CHAPTER 7 BANKRUPTCY

1. DOES BANKRUPTCY AFFECT ALL CREDITORS EQUALLY?

Yes, by law. All creditors must be listed by a petitioning debtor and all are treated equally within their respective classes. This legal principal of treating all creditors equally is fundamental to bankruptcy in the United States.  Since creditors are often in different classes, their treatment in any one case may be remarkably different. For instance, a secured creditor has its collateral to look to and an unsecured creditor does not. Secured and unsecured are the two main forms of creditors claims.

 

2. WHAT IF A DEBTOR WANTS TO PAY ONE CREDITOR AND NOT OTHERS?

After bankruptcy, there is no law against a debtor paying any or all creditors from post-petition earnings. This personal treatment is often not equal or even fair. Bankruptcy is an official bar to the enforcement procedure to collect debts. Payment cannot be forced after bankruptcy. Many debtors, for moral or family reasons, do pay some debts after filing. The only reward for post-filing payment is the moral satisfaction, as no official sanction or record for credit for this unnecessary conduct are maintained anywhere. A creditor who solicits a debtor's moral response risks contempt of court for even trying!

 

3. CAN A CREDITOR CONTACT A POTENTIAL DEBTOR?

Before a bankruptcy petition is filed, reasonable contact is appropriate. The Automatic Stay created by the filing of a bankruptcy petition is quite specific: a creditor should not contact a debtor directly once the petition is filed. If there is a matter of immediate concern, a creditor may contact the debtor's attorney after filing. Most bankruptcy courts list the debtor's attorney on the notice form creditors receive immediately after a debtor files. A debtor's attorney's name can also be obtained from the records filed with the bankruptcy court.  For cases filed after October 17th, 2005, a creditor may demand from debtor's counsel a copy of the debtor's last filed federal tax return and copies of all returns filed while the debtors are in bankruptcy.

 

4. DOES A CREDITOR NEED AN ATTORNEY'S REPRESENTATION IF A DEBTOR OF THAT CREDITOR FILES BANKRUPTCY?

This decision has to be made on a case-by-case basis. A creditor should without fail, consider filing a proof of claim. If that can be done without counsel and there are no apparent improprieties, the expense of hiring an attorney is frequently not justified.

Chasing a bad debt with good money is not worthwhile, but a knowledgeable businessman will never benefit by abandoning a collectible account. Large unsecured creditors and virtually all secured creditors will benefit by representation. If a creditor suspects misconduct, and there are others involved as co-debtors, an attorney is probably necessary. Recognition of improprieties and other possible options for collection nearly always requires legal training.

 

5. ARE THERE CIRCUMSTANCES WHEN A CREDITOR SHOULD NOT FILE A PROOF OF CLAIM?

Yes, there may be. Normally a creditor actually seeking payment from a debtor's estate has little to lose by filing a Proof of Claim. As of this writing, however, the United States Supreme Court has decided a jurisdictional case that may extend the bankruptcy court's ability to hear certain cases between debtors and creditors if the creditor "submits to jurisdiction" by filing a Proof of Claim.

When a creditor gains knowledge of a filing, especially a foreign district, some thought need be given to the relationship with the debtor prior to filing each claim. Competent counsel is required.

 

6. DOES IT REQUIRE AN ATTORNEY TO BE A SPECIALIST TO REPRESENT A CREDITOR IN BANKRUPTCY?

There are many highly qualified lawyers who represent creditors and debtors in Chapter 7 bankruptcy cases. There are fewer who are willing to represent creditors in a Chapter 13 case and still fewer who are comfortable representing creditors in a Chapter 11 or Chapter 12 proceeding.

The more intricate the proceeding is, the more experience is necessary. Many attorneys exclude this representation from their practice. Many districts have not recognized state agencies that designate a specialization in this area of the practice of law. Current attorney advertising rules permit counsel to acknowledge their availability to creditors in the area of bankruptcy. An attorney who does not feel qualified to represent creditors is required to tell prospective clients he is not qualified and refuse to take bankruptcy cases.

 

7. WHAT MAY A CREDITOR EXPECT TO BE CHARGED FOR THIS REPRESENTATION?

Most legal services in bankruptcy cases are rendered to creditors in Wyoming on a transaction basis (e.g. proofs of claim filed for between $10 and $100 depending on their intricacy), by retained counsel as part of a retainer arrangement, or on an hourly basis that presently varies, in the author's district, from $185 to $265 depending on the skill level of the attorney.  Corporate fee applications in national cases disclose hourly rates of as high as $350-$450 per hour in large technical cases. The amount of attorney time required in each instance will vary greatly depending on the attorney's familiarity with bankruptcy procedures. In some communities, the charges may be somewhat higher where it is necessary for counsel to commute long distances to the federal bankruptcy court. Usually the attorney will want his fee paid in advance. An attorney who frequently represents debtors in bankruptcy will be a very able assistant to creditors. The clerk of the bankruptcy court, although she may not recommend any particular attorney, may furnish the names of attorneys who regularly represent creditors and/or debtors in the bankruptcy court.

 

8. IS IT LESS EXPENSIVE FOR A CREDITOR TO COMMUTE TO CITIES WHERE THE COURT PROCESS TAKES PLACE TO OBTAIN AN ATTORNEY OR TO HIRE AN ATTORNEY FROM HIS COMMUNITY AND PAY THAT ATTORNEY TO COMMUTE?

The fees involved may vary. Many rural attorneys regularly associate with attorneys in the cities where cases from their area are heard and can avoid actually traveling by cooperating with another qualified attorney. A creditor should consider this problem and ask prospective counsel what procedure and cost will be involved.

 

9. HOW ARE CREDITOR'S CLAIMS CLASSIFIED BY THE BANKRUPTCY COURT?

There are certain creditors who are given priority (e.g., they are paid pro rata in their class and ahead of all classes with lower priority) in payment from proceeds collected and liquidated by the trustee. See question number 21 for a list in order of priority.

 

10. HOW ARE LANDLORDS TREATED?

Absent state law to the contrary, or clear language in a written lease, most bankruptcy courts do not presently recognize common law lien rights in favor of landlords. This means that once a tenant files bankruptcy, his possessions cannot be held to secure back rent. They must be turned over to the trustee.

      Landlords are treated as unsecured creditors through the date of filing. A lease is treated as an executory contract.(1) Pre-petition rent is not a priority claim under current law. The estate property left on premises must be preserved; converting estate property is a federal felony. After filing, landlords are able to claim some value for premises occupied by estate property as an administrative expense. This expense is paid from assets of the estate as a high priority but may not be allowed to the full extent of rent under the original tenancy. Trustees have sixty days from the date the petition is filed to cure lease defects and reinstate a lease for its full term (even if the landlord does not wish that to happen). Landlords should contact the trustee immediately after filing and should cooperate fully in order to resolve the tenancy with the estate quickly.

 

11. WHAT STEPS SHOULD A CREDITOR TAKE TO PROTECT HIMSELF WHEN IT FIRST COMES TO HIS ATTENTION THAT A DEBTOR MIGHT FILE BANKRUPTCY?

He should evaluate his position carefully. Sometimes, with creditor cooperation bankruptcy can be avoided. If a creditor does not consider a compromise to be in his best interest, there are alternatives available, like obtaining a last minute co-signer. Having the debtor pledge additional collateral is another alternative.

        A bankruptcy trustee, however, has certain statutory authority to set aside transfers made by a debtor that cause one existing creditor to receive a disproportionate share of the debtor's total estate. A creditor may find that last minute planning involving new collateral or large single payments (within forty five days, ninety days or one year in various cases) does no good, the receipt of a preferential payment may be ordered to turn the collateral or payment over to the trustee for the benefit of all creditors equally.

 

12. WHAT STEPS SHOULD A CREDITOR TAKE WHEN HE RECEIVES OFFICIAL NOTICE THAT A DEBTOR HAS FILED STRAIGHT BANKRUPTCY?

This will depend on whether or not he has a secured or an unsecured claim.

 

13. WHAT SHOULD A CREDITOR DO IF HE FINDS OUT ABOUT A BANKRUPTCY WITHOUT "OFFICIAL NOTICE"?

Exactly what he should do if he has "official notice".

The bankruptcy protections flow automatically without notice! Obviously the sanctions for violating an Automatic Stay would be worse if the violations were intentional and knowing, but these results are equally void in the absence of notice.

Permanent relief - - e.g. a discharge - - is available to a debtor from anyone with actual notice regardless of whether or not it is official actual notice. A debtor is best protected by listing every creditor on his petition where mere listing is considered proof of notice. But proving notice any other way will suffice to gain a debtor protection. A creditor takes a significant risk when bankruptcy is suspect not to ferret out information.

 

14. WHAT STEPS SHOULD AN UNSECURED CREDITOR TAKE WHEN HE RECEIVES OFFICIAL NOTICE THAT A DEBTOR HAS FILED BANKRUPTCY?

The Automatic Stay bars a creditor's recovery from the debtor. An unsecured creditor has the right to recover from the estate. To participate in any distribution there may be from the estate, he must file a proof of claim. This simple form can be obtained for free, filed for free, and filling it out properly takes very little time. Yet, every year thousands of creditors fail to go to the trouble. In all jurisdictions, estate distributions go disproportionately to the proving few at the expense of the nonproving many.

 

15. SHOULD A CREDITOR ATTEND THE 341 MEETING?

Whether or not attendance is productive or a waste of time must be decided on a case-by-case basis. Unless a creditor is fairly well aware of the procedure involved, it does little good to attend without competent counsel to allow a creditor full participation.

If a creditor is owed a large percentage of the total debt, he may wish to involve counsel and participate in selecting the trustee who is appointed at a 341 meeting. The U.S. Trustee has a standing panel of trustee candidates that are appointed as "interim trustees." Interim trustees serve from the time of initial filing until the 341 meeting. If a creditor objects to a particular trustee serving on a permanent basis, the 341 meeting is continued, and an election is held to select a permanent trustee based on a vote by creditors in proportion to their claims. U.S. Trustee-appointed trustees are experienced and work diligently at this oftentimes poor-paying job. Unless a creditor has a significant personal concern, it may be difficult to find a trustee who would better serve his position.

 

16. WHAT IF A CREDITOR IS UNSECURED AND SUSPECTS SOME IMPROPRIETY ON THE PART OF THE DEBTOR?

He should speak to an attorney about the matter immediately! Certain actions on the part of the debtor can give rise to his not obtaining a discharge, or the dischargeability of a particular debt can be denied.

        Unfortunately, there is a very short period of time (90 days by court order in Wyoming) during which most of these issues must be raised or they are lost. The statute of limitations is strictly enforced.

 

17. HOW ARE ISSUES OF NONDISCHARGEABILITY RAISED?

Just like in non-bankruptcy cases--by lawsuit. The bankruptcy court tries these cases called adversary proceedings. They are filed by the creditor, and the debtor is treated like a defendant in a civil suit. Most debtors' attorneys charge extra for representation in adversary proceedings.

        If the creditor is successful in his challenge, the bankruptcy court will award judgment in his favor which is the same as any judgment in any other court. An action of this sort must be considered carefully, as there are instances when penalties can be assessed against a creditor who vexatiously challenges a debtor and loses.(2)

 

18. HOW CAN A CREDITOR OBTAIN MORE INFORMATION ABOUT A DEBTOR?

Once filings go to a bankruptcy court they are public records and can be viewed at the bankruptcy court clerk's office during business hours. All bankruptcy filings are now available on line through the Federal Court's Pacer system.  Public access to electronic files is fabulous.  This office in an E-filer.  We file all bankruptcy court pleadings electronically.  Technology brings with it a set of its own problems, but compared to the paper world, this is progress.

        Copies can be obtained from the clerk's office, although they are expensive as the clerk's office is forced by sheer volume of workload to restrict this time-consuming service. Many times the debtor's attorney will provide copies.  See the resources page on this site for access to the clerks' offices over the internet.

 

19. WHAT HAPPENS IF A CREDITOR DOES SOMETHING THAT IS "ILLEGAL" TO A DEBTOR?

I am not sure what illegal means, but if the stay order is violated (i.e., if the debtor is contacted directly, harassed or civil suit process commences or continues) the moving party risks wasting the effort. In flagrant situations, the actor can be found in contempt of court which could involve penalties such as assessed costs, assessed attorney fees, fines or even removal to the federal district court and jail.(3)

 

20. WHAT STEPS SHOULD A SECURED CREDITOR TAKE WHEN HE RECEIVES AN OFFICIAL NOTICE THAT A DEBTOR HAS FILED STRAIGHT BANKRUPTCY?

A secured creditor's most productive remedy is the timely collection by sale of his collateral. See Answers No. 21 through No. 30 as they also apply.

 

21. WHAT IS THE EFFECT OF A CREDITOR'S SECURITY AGREEMENT ON EXEMPTIONS?

Almost all security agreements waive a debtor's ability to assert exemptions. This form of contractual waiver is generally enforceable. Where exemptible property is properly pledged as collateral, it can be repossessed and the proceeds applied to the debt. There is, however, an exception. A new bankruptcy code provision allows a debtor to void a non-purchase money security interest in certain household goods and furniture to the extent of the Wyoming exemption.

 

22. IS A CREDITOR'S RIGHT TO REPOSSESSION AFFECTED BY THE "AUTOMATIC STAY"?

Yes. Repossession is stayed. Before repossessing, a creditor must obtain leave of the bankruptcy court or the consent of the debtor through counsel and the release of the property by the trustee. Leave of the bankruptcy court is obtained by filing an   APPLICATION FOR RELIEF FROM THE AUTOMATIC STAY. As with non-bankruptcy foreclosures, only the very simplest repossession should even be considered without the advice and assistance of an attorney.(4)

 

23. WHAT IF A CREDITOR'S COLLATERAL IS DEPRECIATING QUICKLY, AND HE WILL BE DAMAGED IN THE TIME IT MAY TAKE TO GET IT BACK?

He can apply to the bankruptcy court for some form of additional protection to avoid this loss. This may include expedited hearings, periodic interim payments from the debtor or the trustee, additional security or other protection like, perhaps, a priority equal to an administrative expense. The application is for "adequate protection" and requires court pleadings that should be prepared by an attorney.(5)

 

24. ARE SECURED DEBTS DISCHARGED?

Yes. Secured debts cannot be collected from a debtor after filing. If a discharge is granted -- they are discharged. The filing does not, however, affect the validity of the creditor's security interest (if it was properly recorded in the first place). The property is available to the creditor first, then to the estate. The trustee may exercise his discretion and conduct a sale while the property is in the estate. The security interest attaches to the proceeds of sale, and a secured creditor receives the value of his collateral that way.

 

25. WHEN DOES A SECURED CREDITOR REGAIN POSSESSION OF THE COLLATERAL?

It may take some time. Most often, the trustee will wait until after the 341 hearing to determine whether or not he will be able to sell secured property for the benefit of the estate at a surplus over the secured payoff. Requesting authority to foreclose prior to a 341 meeting will cause the matter to be set for hearing after the 341 meeting. Filing the request afterwards will often result in immediate action by the trustee (sale or abandonment).

 

26. WHAT HAPPENS TO A DEBTOR'S INCOME AFTER FILING?

Normally any money earned by the debtor after the date a petition is filed is his to keep. There is a code provision which gives the trustee the right to property inherited or received by the debtor in a divorce up to six months after filing.

 

27. HOW DO PEOPLE DRIVE CADILLACS AFTER FILING BANKRUPTCY?

Creditors are frequently offended when they see a recent debtor flaunting an extravagance. The explanation is oftentimes quite simple. Many cars, for instance, are financed with little or no equity involved. A new Cadillac can be more of a liability than an asset. If it has no value to the estate, the trustee does not want it. If the creditor allowed the debtor to reaffirm in lieu of foreclosure, the debtor actually pays for the car with money that he is earning after filing bankruptcy. A debt which is reaffirmed after the filing of the bankruptcy petition is not discharged.

 

28. WHAT IS REAFFIRMATION? 

For quite a number of years Wyoming and Colorado were forth choice jurisdictions.  A debtor had four choices with a secured lender's collateral.  They could surrender it, redeem it (a one time payment for consumer items), reaffirm the debt, or merely keep the payments current and retain the collateral thereby.  the fourth choice, essentially non recourse financing was such an overwhelming good deal we saw very few reaffirmations.  BAPCPA of 2005 changed all of that.  There is no fourth choice mandated, although, occasionally a creditor will volunteer to accept regular payments without a formal reaffirmation agreement. 

        A reaffirmation is a simple agreement between a creditor and a debtor after a Chapter 7 bankruptcy whereby the debtor pays a creditor and keeps secured property, if applicable, after filing. Under the old bankruptcy act, certain actions of a debtor could reinstate an old obligation (an automatic reaffirmation). That is no longer the case. Without court approval, no reaffirmation is enforceable under present law. Creditors should only agree to a reaffirmation if the debtor's history with them is good. Oftentimes a debtor is in trouble with some creditors but is never a problem for certain secured creditors where the borrower values the collateral highly.

        Reaffirmations involving the debtors home need not be approved by the court.  BAPCPA substantially redid the application form for reaffirming.  The debtor must set out income and expenses and convince the court that a proposed reaffirmation is doable.  If the application differs from Schedule I  (Income) and Schedule J (expenses) the court may set the matter for hearing and inquire about the wisdom of reaffirmation.  Debtors counsel is not required to, but a debtor represented by an attorney in a reaffirmation must have counsel's signature on the form.  Absent counsel, the application is set for court inquiry, i.e.  a hearing on the wisdom of the process.(6)

         

 

29. WHAT DEBTS CAN BE REAFFIRMED?

All debts can be reaffirmed, but only with court approval. As a consequence, only secured debts or non-dischargeable debts are normally reaffirmed, and they can only be reaffirmed for the value of the collateral. Most courts decline to approve reaffirmations of general unsecured claims. Without the court's blessing, no legally enforceable obligation exists. Some completely unenforceable agreements, however, are paid in a timely manner..

 

30. HOW ARE DEBTS REAFFIRMED?

Debts are reaffirmed in writing and approved by the court. This has to be done prior to the entry of a discharge. Often, debtor's counsel will assist in providing a written reaffirmation agreement.

 

Do you have a question about Chapter 7 creditor problems or any aspect of bankruptcy?

Click here to e-mail it to the firm. QUESTION  Responses of general interest may be used to update Plain Talk, all Wyoming and Coloraodo inquiries will receive a reply.

 

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1. 1See 11 U.S.C. 363

2. 2See 11 USC 523

3. 3See 11 USC 362(h)

4. 4See 11 USC 362(d)

5. 5See 11 USC 361

6. 6See 11 USC 524

 

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