Steve Harms

Monday, May 9, 2011

Bankruptcy: Some of the features you need to know

Bankruptcy operates in its own little world. It has its own court system, and its own terminology. A bit of familiarity with bankruptcy jargon and procedures can be helpful:

* Automatic stay: The filing of a bankruptcy petition triggers a 120 day period during which creditors may take no action against a debtor or the debtor’s property. Under some circumstances it may be possible to get a bankruptcy court to grant relief from the automatic stay, but absent court permission a violation can trigger contempt sanctions.

* Filing a proof of claim: When you receive a notice of bankruptcy, stop your collection activity and file a proof of claim. Through doing so, you will receive a dividend or a payment equivalent to what other unsecured creditors will receive. If you do not file a proof of claim, you will probably not receive additional notices and you will also probably not receive a dividend.

* Preference payments: A preference is money paid to a creditor on the account while the debtor was insolvent and within 90 days of the bankruptcy filing. If you receive payment under those circumstances, the bankruptcy trustee may demand that you repay the preference amount. If you haven’t made any special deal with the debtor and he owes you the money, that may not seem fair. But the theory is that a bankrupt debtor shouldn’t be allowed to pick and choose which creditors he wants to pay within 90 days of the bankruptcy filing. (Besides, more often than not you won’t be the lucky creditor who received that $1,000, and it will somehow seem fairer that the money comes back into the pool.) Preferences are limited to amounts over $5000 in commercial and $600 consumer.

* Getting stuff back from the bankrupt debtor: Within 45 days of a bankrupt debtor’s receiving your product, you may be entitled to demand its return if the sale was an ordinary sale that occurred while the bankrupt was insolvent, and you make your demand while the debtor is still in possession of those goods. When you have the right to do so, make a written demand for the return of that product. As a practical matter, telephone the debtor first to let them know that the demand is forthcoming, then follow up with a quick writing. Once the debtor ships the goods to one of its customers, you lose the right to reclaim.

* Creditors’ Committees: In some large bankruptcies, primarily Chapter 11’s, creditors’ committees are formed of the 5 or 7 largest unsecured creditors. If your company is one of the larger creditors, you may receive a notice and an opportunity to sit on the creditors’ committee. Membership on a creditors’ committee is entirely optional and voluntary.

* Dischargeability and Nondischargeability: Some of the debts of a bankrupt debtor are dischargeable and others are nondischargeable. Typical dischargeable debts include ordinary trade debt, ordinary credit card debt, utilities, unsecured bank loans and other forms of unsecured debt. The debtor doesn’t have to pay any portion of a debt that is discharged.

Other forms of debt just never go away. The government, for example, gives itself a great deal of protection from bankruptcy. Taxes, court fines and student loans are usually nondischargeable debts because they are due to or guaranteed by the government. Other examples of nondischargeable debts include child support, and debts resulting from fraud or malicious acts taken against persons. Should you have a debt that you believe is nondischargeable, you may benefit from consulting a lawyer about filing a special action within the bankruptcy court to declare your debt nondischargeable. If the action succeeds, debtor will still have to pay the debt, even after bankruptcy.

* Reaffirmation and Redemption Agreements: Sometimes a debtor wants to keep secured collateral, such as a car or house that is subject to a lien or mortgage. Reaffirmation and redemption agreements allow the debtor to pay part or all of a debt owed to a secured creditor in order to keep the collateral. In a reaffirmation agreement, the debtor agrees to keep making payments on the loan in order to keep the collateral. Sometimes the terms of the loan are modified. In a redemption agreement, the debtor agrees to pay off the balance owed in order to keep the collateral. If the amount owed exceeds market value, redemption may occur following a motion with the court to permit redemption at market value.

* Dismissal of a bankruptcy proceeding: Sometimes debtors file bankruptcy in order to get people off their backs. Once the immediate pressure from creditors is removed, bankruptcies are sometimes quietly dismissed. Dismissal lifts the automatic stay, permitting you to proceed against the debtor as if bankruptcy had never been filed.

The Bankruptcy Act is about a million pages long and includes about a million incomprehensible terms, only a few of which are referenced above. Rather than trying to figure out the ins and outs of the law, your best bet is to file a timely proof of claim and just wait and see what happens. If you feel you have a special cause of action, such as fraud or the right to get your stuff back (goods shipped to the debtor within 45 days), consider talking to a bankruptcy attorney.

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1 comment:

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Bankruptcy Act is in favor of both creditor and debtor.With the help of rules there would be no issue in any deal.Your blog is helpful in differentiating in legal and illegal deals and way of collection.