Bankruptcy laws exist to cease all collection actions. The filing of the bankruptcy imposes an “automatic stay”. The moment the bankruptcy is filed all collections against the debtor must cease. This gives the debtor breathing room to allow it time to evaluate and take action on the debts it will remain responsible for, whether through a plan or a discharge.
Types of Bankruptcies
There are five (5) types of bankruptcies, known a Chapters 7, 9, 11, 12 and 13. These Chapters are from Bankruptcy Code 11 USC 362.
Chapter 7 – This is one of the two most commonly filed bankruptcies. This is usually a straight forward process and last for about five (5) months. The debtor is saying to the court and its creditors it has no money to pay off its debts and asks the court to discharge all of its unsecured debt and personally relieve its responsibility to all of its pre-petition debt. Proof of Claim is not to be filed unless notified that the case is an Asset Case.
Chapter 13 – This is a reorganization bankruptcy in which the debtor retains his property and seeks approval of a payment plan (Chapter 13 Plan) through the bankruptcy court to pay off the pre-petition debt. This type of bankruptcy can last for 3 to 5 years. A Proof of Claim should always be filed.
Chapter 11 – This bankruptcy is used by an entity or person with an operating business. This type of bankruptcy can be seen as a combination of a Chapter 7 and a Chapter 13. There may be a liquidation of assets to pay creditors but also a plan is made to do so as well. Debtor is in Possession of assets instead of a bankruptcy trustee.
Chapter 9 – Bankruptcy used by municipalities – a political subdivision or a public agency.
Chapter 12 – This bankruptcy is used for family farmers and fishermen. This is similar to an 11 in that the debtor reorganizes and pays off debt from future earnings. The debtor maintains its assets.
Relief from the “Automatic Stay”
Relief from the automatic stay is accomplished three ways: dismissal of the case; closure of the case; or an Order for Relief from the Stay. The grounds to seek an Order for Relief vary depending on the bankruptcy Chapter. In a Chapter 13, the more common ground for relief is lack of adequate protection (i.e. failure to make post-petition payments). In a Chapter 7 bankruptcy, the grounds for relief would be if the property in question has no equity and is of no value to the bankruptcy estate. Order for Relief is granted to the moving creditor and is for a specific real or personal property in the bankruptcy estate.
Communication with Debtor
No collection action should be taken during the automatic stay. That includes anything written or spoken with the attempt to collect the debt. If there is communication with the debtor initiated by the creditor and the debtor is represented by an attorney, any and all communication should be through the attorney unless the debtor initiated the communication. It is recommended that the debtor’s attorney is copied on response to debtor.
Payments Received during a Bankruptcy
Payments received during a Chapter 7 should not be accepted. However, if the discharge has been entered the payment can be applied to the post-petition (after the bankruptcy filing date). It is good to get the approval of the attorney for the debtor to take in such payments.
In a Chapter 13 bankruptcy, it should be determined first who is sending the payment. Payments received from the debtor should be applied only to the post-petition assessments. Payments received from the Chapter 13 Trustee should be applied to the pre-petition account.
How Bankruptcy Effects Foreclosure
If there is no lien filed prior to the bankruptcy filing and a discharge has been granted the pre-petition debt (debt owed prior to the filing of the bankruptcy) is discharged and no collection of that debt can be made. If there is a lien recorded before the bankruptcy filing the debt is secured and not discharged.
A Payment Plan should be voided if a bankruptcy is filed. If it is a Chapter 7 bankruptcy and an attorney is of record, the attorney can be contacted to get an agreement that the payment plan will not be in violation of the bankruptcy.
Bankruptcy stays all actions. A sale will not be valid if a bankruptcy is filed prior to the sale taking place. If the sale takes place before the bankruptcy is filed, the Trustees Deed Upon Sale can be recorded within 15 days to perfect the sale. There is some argument that the TDUS cannot be recorded because of the bankruptcy.
Bankruptcy filed during the Redemption Period stays all collection actions. It can be argued that the Certificate of Sale is part of the sale process that took place prior to the bankruptcy. The same argument can be argued for the Trustee’s Deed. On the other hand there is an argument that the bankruptcy stays any further action.
How can we help?
S.B.S. can monitor the status of the bankruptcy, file a Proof of Claim, have Motion for Relief filed, have an Objection to Chapter 13 plan filed and communicate with debtor and its attorney. Utilizing our in-house bankruptcy service will relieve you from finding an attorney to handle and it assures unified focus on your matter.