Creditor Beware: The Notice of A Bankruptcy Filing
Posted on Jun 30, 2011
Sooner or later, it is bound to happen. Your company receives a notice that one of your vendors has filed for bankruptcy. This vendor owes you money. What do you do? First, don’t despair. Although you may be tempted to crumple up the notice and toss it into the trash can thinking that you may not receive any money you’re owed, don’t do it. It is true that creditors in bankruptcy may not receive full payment of what they are owed. Second, remember there are exceptions to every rule and the map to determining whether any exceptions exist for you is in your hand. What does a bankruptcy filing mean for you? At the risk of sounding lawyerly, in short, “It depends.” Not only does the outcome hinge on the type of bankruptcy case filed, but the surrounding circumstances of the filing and your status as a creditor are also important. This article highlights the various types of bankruptcy filings and a glimpse of legal implications of the information contained within the notice of a bankruptcy filing.
What are the types of bankruptcy cases?
The United States Bankruptcy Code (the “Code”) is divided into what are referred to as chapters. Those chapters are as follows: chapter 7 (liquidation, either individual or business that results in a “discharge” or forgiveness of most debts), chapter 9 (reorganization, municipality), chapter 11 (reorganization, mainly for businesses but available to individuals who do not qualify under chapter 13), chapter 12 (reorganization, family farmers), chapter 13 reorganization, individuals with unsecured debts less than $307,675 and secured debts less than $992,975), and chapter 15 (reorganization, across borders).
Chapter 13, or individual reorganization cases, are the most commonly filed cases in Vermont. Chapter 7 filings run a close second followed by chapter 11. This primer focuses on filings under chapters 7 and 13. In a chapter 7 case, the debtor’s property which is not exempt under either Vermont or federal law, may be liquidated and the proceeds distributed to the debtor’s creditors. In a chapter 13 case, a debtor files a reorganization plan, subject to court approval, that repays a portion of the debt he or she owes over a three to five year period. One of the goals of bankruptcy is that similarly situated creditors will be treated alike. Under a chapter 13 plan, it is not necessary for each creditor to receive the same distribution, but only that similar creditors receive the same pro-rata share of what they are owed. For instance, all unsecured creditors should receive the same pro-rata distribution or an explanation provided to distinguish a certain creditor or group of creditors. Upon completion of the plan payments, the remaining debt is discharged, or forgiven. A case Trustee assigned by the Court but overseen by the United States Trustee’s Office, a subsection of the Department of Justice, administers the liquidation of the debtor’s available assets in a chapter 7 case and the plan process and implementation in a chapter 13 case.
What do I do if I receive a Notice of a Bankruptcy Case? Why is this notice important and what does it mean?
Stop collection efforts. You have received actual notice of the bankruptcy filing. Prior to October 2005, the filing of a bankruptcy case imposed an automatic stay on all efforts to collect or enforce a debt against the debtor. In cases filed after October 2005, the stay is not so automatic and in certain circumstances, may not apply. Consult an attorney to determine whether the automatic stay applies and until you receive confirmation that it does not, cease collection efforts. Because you have actual notice of the bankruptcy filing, sanctions, in the form of punitive damages, may follow if you continue to either collect or enforce what the debtor owes.
Take Notice.The debtor has identified you as a creditor, or that he or she owes or may owe you money. Upon filing a bankruptcy case, the debtor files schedules, statements, and disclosures. The Bankruptcy Noticing Center has received your information from the debtor and you may be affected by the bankruptcy filing.
If the debtor has identified you as a creditor then the discharge, or forgiveness of the debtor’s obligations, that occurs approximately 60 days after the first scheduled meeting of creditors in a chapter 7 or upon completion of the plan payments in a chapter 13 may affect the amounts that the debtor owes you or your ability to look to the debtor for payment.
Attend the Meeting of Creditors. First, the notice sets a date for a “Meeting of Creditors” which in the bankruptcy world is also referred to as a 341 meeting, after the section of the Code that provides for the meeting. When a bankruptcy case is commenced, the debtor must file a set of schedules which detail the debtor’s assets, claimed exemptions, and creditors. At the meeting of creditors, the debtor must appear, be placed under oath, and answer questions about the filed petition and schedules. The most important thing to know is that all creditors are invited and able to attend, either through counsel or on their own. Although under oath, the meeting of creditors is not a hearing in front of a judge but rather an interview, on the record, regarding the debtor’s financial affairs. Generally, the trustee assigned to the case, the debtor and his or her counsel if there is one, and creditors attend. This is an invaluable opportunity to question the debtor about his financial state. However, in order to meaningfully evaluate the debtor’s financial status, you should obtain a copy of the debtor’s petition and schedules. These are available from the Court. Questions at a Meeting of Creditors often include those about additional property not disclosed by the debtor senior security interests in the same collateral, allegations of fraud, judgments etc.
In a chapter 7 case, if the debtor can be shown to have committed certain acts, such as making a false oath (the petition and schedules are completed under the pains of perjury), defrauding creditors, failing to explain any loss of assets, or concealing, destroying, mutilating, falsifying or failing to keep or preserve any recorded information, including books, records and papers from which the debtor’s financial information or business transactions might be ascertained, then the Court may deny the debtor a discharge all together. Hence, information related to any of these acts may be extremely helpful for you as a creditor and will, in effect, nullify the debtor’s bankruptcy filing.
In a chapter 13 case, the Meeting of Creditors may take place either before or after the Debtor’s proposed plan is filed. In the District of Vermont, the Meeting of Creditors often happens after the proposed plan has been filed and the Meeting of Creditors is generally scheduled for the same day as the confirmation hearing, during which the Court considers the plan and whether to approve the plan. In addition to the petition and schedules, the Meeting of Creditors is also a forum to question the debtor about the proposed plan. In order to be approved by the Court, the proposed plan must, among other things, treat similarly situated creditors equally, award to creditors at least as much as they would receive in a chapter 7 liquidation, the proposed payment must account for the debtor’s disposable income while being feasible. In other words, if the debtor is on such a tight budget (according to the schedules) that he or she will only have $1.50 left to his or her name a month to cover necessities, then the plan may not be feasible. The Meeting of Creditors is a wonderful avenue to explore issues with the proposed plan.
File a Proof of Claim. Secondly, the notice of a bankruptcy case also contains a Deadline to File a Proof of Claim. A proof of claim provides prima facie evidence of the amount of money a debtor owes. In other words, the proof of claim conclusively establishes the amount of your claim unless the debtor objects to it. The filing of a proof of claim is most important in a chapter 13 or an asset chapter 7. Unfortunately, it may not always be clear upon filing whether a chapter 7 case will ultimately prove to be an asset case, where assets are available for distribution for creditors. A proof of claim form is available at the Court’s website and is relatively straightforward to prepare. A creditor must attach any supporting documentation for the amount of money owed.
Evaluate Claimed Exemptions. Thirdly, the notice of a bankruptcy case also contains a deadline for objection to claimed exemptions. Any property that is not exempt is subject to liquidation in a chapter 7 case. For example, the Vermont homestead exemption is $75,000. If a debtor owns his home that is valued at $200,000, free and clear of any mortgage, then the home may be sold and $125,000 of the proceeds (provided it sells for its appraised value) is available to be distributed to the debtor’s creditors. The debtor retains the amount of his exemption, $75,000. There are various exemptions – ranging from vehicles to livestock. You need not become an expert in exemptions; the case Trustee analyzes the debtor’s exemptions on behalf of all the creditors. However, in some instances, creditors have more or different information than the debtor provides in his filed schedules. The exemption analysis is no less important in a chapter 13 case where the creditors must receive under the plan at least what they would have received had the debtor filed his case under chapter 7.
Object to the Debtor’s Discharge, if applicable. Fourth, the notice of a bankruptcy case also contains a deadline for objections to discharge. As touched on above, most, but not all, claims are dischargeable either upon the 60th day after the first meeting of creditors in a chapter 7 or upon completion of a chapter 13 plan. Certain types of debt can be excepted from discharge including, but not limited to, the following: 1) domestic support obligations (child support or spousal maintenance); (2) fraud while acting in a fiduciary capacity, embezzlement or larceny; (3) willful and malicious injury; (4) to the extent the debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit; (5) student loans except in limited circumstances; (6) for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated. If you hold such a claim against the debtor, then a separate action in bankruptcy court, called an adversary proceeding, must be filed to determine the dischargeability of your debt within the specified period of time.
Consult an attorney. In sum, the notice of a bankruptcy filing is an important document and should be regarded as such. It contains a plethora of information that may affect your ability to collect or enforce whatever amount you are owed. If you are uncertain how you will be affected by the bankruptcy filing, seek legal counsel.