Bankruptcy Basics Refresher for Creditors

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As you may have seen, bankruptcy cases are on the rise. Previously, case filings had been down as a result of government assistance, better economic times, low unemployment, and moderating inflation. But that seems to be changing and now is a good time to refresh your knowledge of some bankruptcy basics.

For creditors, understanding these basics is crucial for protecting your rights and maximizing recovery in challenging financial situations.

Types of Bankruptcy

Bankruptcy cases are typically filed under Chapter 7, Chapter 11, or Chapter 13 of the Bankruptcy Code.

  • Chapter 7: Involves the liquidation of assets to pay off debts. Creditors may receive a distribution of the proceeds based on the priority of their claims.

  • Chapter 11: Primarily used for business reorganization. Creditors may be involved in the formulation and approval of a reorganization plan that outlines how debts will be repaid.

  • Chapter 13: Allows individuals with regular income to develop a plan to repay all or part of their debts over a specified period, usually three to five years.

Automatic Stay

When a bankruptcy case is filed, an automatic stay goes into effect, preventing creditors from pursuing collection efforts against the debtor. This includes halting lawsuits, foreclosures, repossessions, and other attempts to collect debts.

Proof of Claim

Creditors must file a proof of claim with the bankruptcy court to assert their right to receive a distribution from the debtor’s estate. The proof of claim should detail the nature and amount of the debt and any collateral securing the debt, and may require assistance of legal counsel in order to comply with Bankruptcy Code requirements.

Meeting of Creditors (341 Meeting)

Creditors have the right to attend the Meeting of Creditors, also known as the 341 meeting, where they can question the debtor about their financial affairs. This meeting, held by videoconference, provides an opportunity for creditors to gather information and assess the debtor’s ability to fulfill their obligations.

Discharge and Nondischargeable Debts

A discharge releases the debtor from personal liability for certain debts, meaning creditors cannot pursue further collection efforts. However, not all debts are dischargeable, and creditors should be aware of exceptions, such as debts resulting from fraud or willful misconduct.

Secured Creditors and Collateral

Secured creditors, those with a security interest in the debtor’s property, have specific rights. They may choose to participate in the bankruptcy process or seek relief from the automatic stay (which requires a motion) to enforce their rights outside of bankruptcy.

Avoidable Preferences and Fraudulent Transfers

A bankruptcy trustee or debtor may sometimes have the power to avoid preferential transfers and pre-bankruptcy transfers of property. Certain payments made by the debtor to creditors within a specific time frame before bankruptcy may be subject to claw back.

Subchapter V

Congress recently enacted Subchapter V of Chapter 11, which allows small businesses to reorganize and can be very advantageous to debtors and secured creditors. Highlights of this new type of bankruptcy include a faster process, a trustee appointed to facilitate forming a plan, and elimination of the requirement that all creditors be paid before owners can retain their equity.

Professional Advice

Creditors would do well to seek legal advice to ensure compliance with bankruptcy rules, protect their interests, and maximize recovery. Bankruptcy is full of traps for the unwary. Attorneys in Perkins Thompson’s Creditors’ Rights and Bankruptcy practice are here to advise and assist creditors business in navigating commercial and consumer bankruptcy, insolvency and recovery law.