Today’s guest blog was written by Andrew Sonnek of Sonnek & Goldblatt, Ltd. Their firm represents creditors in a wide variety of matters statewide in Ohio, Indiana and Kentucky, in both Federal and State Court.
Any business or individual with accounts receivable usually has experienced the incredible roadblock that a bankruptcy filing causes when attempting to collect a debt. Once you are aware that a debtor has filed bankruptcy, you must stop all collection activity. However, depending on the type of case filed and other factors, there still may be a chance for recovery. This post is intended as a very basic overview of the means by which recovery may be achieved through the debtor’s bankruptcy case.
Usually, you will receive a notice from the Bankruptcy Court via US Mail that one of your debtors has filed for bankruptcy. However, in order to receive a notice from the Bankruptcy Court, the person who owes you money must list your debt on their bankruptcy schedules. These are just a part of the voluminous paperwork the debtor must file to begin their bankruptcy case with the Court. But, just because the debtor doesn’t list your debt or you don’t receive a timely notice does not mean that your debt is not discharged upon successful completion of the debtor’s bankruptcy case. If you are concerned that your debt was not listed on a debtor’s bankruptcy schedules, it is advised that as soon as possible you contact a creditors’ rights attorney who also handles bankruptcy matters. If you did not receive a notice, a creditors’ rights attorney can generally obtain a copy of the notice by using their attorney credentials to see the docket and documents online for the bankruptcy case.
Consider the Type of Bankruptcy Filed
The Notice of Bankruptcy will indicate which type of bankruptcy the debtor filed. With some exceptions, the debtor usually will file a Chapter 7 or Chapter 13 Bankruptcy. There are also Chapter 11 Bankruptcies. They are generally filed by medium to large-sized businesses to reorganize their debts, pay the liabilities back over time and keep their business operating. Chapter 11 cases are very expensive and complicated, so it follows that the majority of entities you will see utilizing Chapter 11 of the Bankruptcy Code are large businesses. Recovery can be made in a Chapter 11 bankruptcy, especially if you are a secured party and the secured property is something the debtor needs to operate their business. Consult a creditors’ rights attorney if you are confronted with a debtor who files a Chapter 11 Bankruptcy Case. Chapter 12 is another bankruptcy option available to certain farmers and fisherman to reorganize their debts.
Recovery in a Chapter 7 Case
Assuming your debtor does file a Chapter 7 or Chapter 13 bankruptcy case, you can look for several things to determine if you have any chance of recovering your debt or a portion thereof. Chapter 7 cases, often referred to as liquidation bankruptcy, are cases in which the debtor’s property is sold/liquated (assuming there is property available to sell), the creditors are paid as much as possible on a pro-rata basis, and the debtor is relieved of their legal obligation to pay their debts at the conclusion of the case. A Chapter 7 case generally takes 4-6 months from beginning to end.
The worst possible scenario for a creditor is that a debtor files a Chapter 7 No-Asset Case, meaning the court doesn’t even set a deadline for creditors to file claims. If you are faced with this situation, you should accept that you will likely be paid nothing on your debt and prepare to incur the loss. However, if you are a secured creditor (meaning you have protected your debt by taking a security interest in certain property of the debtor), you have other rights to collect on your debt or redeem the property securing your debt through the bankruptcy. You should talk to a creditors’ rights attorney for proper advice in this situation.
Debtors in each bankruptcy case can exempt certain property from being sold by the Bankruptcy Court. Exemptions are provided under state or federal law, depending on where your debtor files their case. Generally debtors can keep certain household goods, a reasonable value in one vehicle, a small amount of cash on hand, and other things. Assuming the debtor does not have any property available for sale above their exemptions, the case would be filed as a No-Assets Case. Again, the worst case scenario for an unsecured creditor.
If the debtor files a Chapter 7 Asset Case, the Bankruptcy Court will set a deadline for creditors to file what is known as a “proof of claim.” Visit the appropriate bankruptcy court’s website to obtain the relevant proof-of-claim form or contact your collections attorney. The proof-of-claim tells the court how much is owed, what the debt is owed for, and itemizes any interest you are charging. Follow the instructions on the court forms to submit your proof-of-claim, or have your attorney file the proof of claim electronically for you and monitor the activity in the case. Keep in mind that the Court may only recover or liquidate minimal assets, so even by submitting a proof-of-claim you may only recover pennies on the dollar for the amount you are owed.
Recovery in a Chapter 13 Case
A Chapter 13 Bankruptcy is generally filed by individuals who have regular income (a steady job with standard pay) and do not want to have their property liquidated to pay creditors. In Chapter 13, a debtor can keep their non-exempt property, but they also must pay back priority and secured claims in full. Unsecured creditors may receive payouts after the priority and secured creditors are paid, depending on the specific Chapter 13 Repayment Plan that is accepted by the Court. A Chapter 13 debtor essentially has to make periodic payments through the Chapter 13 Bankruptcy Trustee’s Office, and then the Chapter 13 Trustee will pay creditors according to the Chapter 13 Plan that was accepted by the Court. Unfortunately for creditors, a Chapter 13 case will take 3-5 years to complete, and in many cases an unsecured creditor will be paid little, if at all. Many times any payment is near the end of the case.
If one of your debtors files a Chapter 13 case, it is advisable to quickly consult with a creditors’ rights bankruptcy attorney so they can file a proof of claim for you and monitor the case for developments or changes. Often times, Chapter 13 debtors fail to complete their Chapter 13 Plan or make the required payments to the Court, and therefore the case is dismissed and your debts can be pursued in collections or through legal action, as it normally would be. It is important that you or your attorney monitor the Chapter 13 bankruptcy case to see whether or not it is completed.
If you as a creditor were the victim of fraud, embezzlement, theft or another malicious act on behalf of the debtor that created a debt owed to you, and the malfeasant debtor filed for bankruptcy, you may have a claim to have your debt declared non-dischargeable by the Bankruptcy Court.
Non-dischargeability is governed by 11 U.S.C. § 523.Ggenerally speaking, a creditor must file what is known as an adversary proceeding to get a ruling from the Bankruptcy Court that the debt is non-dischargeable. Keep in mind that Non-dischargeability actions are expensive and most attorneys will only accept representation at a reasonable hourly rate and with a reasonable retainer. You should also understand that a successful Non-dischargeability action will require good documentation and proof of the malfeasance. (A prior criminal judgment against the debtor is very helpful).
Your creditors’ rights attorney can help you do an analysis, including a cost analysis, to determine if pursuing a Non-dischargeability action would be beneficial and/or worthwhile. In some cases, if the debt is large enough to outweigh costs, and the debtor has sufficient assets or steady employment to pay back the debt, it could be beneficial to pursue a Non-dischargeability action. In all cases, speak to your creditors’ rights attorney to help you make this important decision.
DISCLAIMER: Neither Sonnek & Goldblatt, Ltd. nor its attorneys guarantee the accuracy of the information provided here. It was written for informational purposes only and does not create an attorney-client relationship. For questions regarding bankruptcy issues for creditors in Ohio, Kentucky or Indiana, please feel free to contact Sonnek & Goldblatt, Ltd. at 513-417-8692, email@example.com, or firstname.lastname@example.org