Sacramento Bankruptcy Lawyer Blog

When filing bankruptcy, the debtor may need to learn new vocabulary to keep up with the progress of his case:

ADVERSARY PROCEEDING: A lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court.

ASSUME: An agreement to continue performing duties under a contract or lease.

CHAPTER 9: The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, villages, counties, taxing districts, municipal utilities, and school districts).

CHAPTER 20: An unofficial term describing the filing of a chapter 7 proceeding followed by a chapter 13. The chapter 7 eliminates unsecured debts while the chapter 13 handles continuing liens.

CLAIM: A creditor's assertion of a right to payment from the debtor.

CONSUMER DEBTS: Debts incurred for personal (as opposed to business) needs.

CONTESTED: Those matters, other than objections to claims, that are disputed but are not within the definition of an adversary proceeding.

CONTINGENT CLAIM: A claim that may be owed by the debtor. For example,where the debtor is a cosigner on another person's loan and that person fails to pay.

CURRENT MONTHLY INCOME: The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy, including regular contributions to household expenses from non-debtors and income from the debtor's spouse if the petition is a joint petition, but not including social security income and other payments made because the debtor is the victim of certain crimes.

DISCHARGE: A release of a debtor from personal liability for certain dischargeable debts identified in the Bankruptcy Code. A discharge releases a debtor from personal liability for dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.

Continue reading "Bankruptcy Vocabulary - Sacramento" »

At a 341 hearing, the Trustee will ask the debtor if he has read the Bankruptcy Information Sheet. Each debtor must read the Bankruptcy Information Sheet usually found in the waiting room at the Trustee's office.

The Bankruptcy Information Sheet tells the debtor that the debtor chooses the kind of bankruptcy that best meets his needs. The debtor may choose between:

• Chapter 7, where a trustee is appointed to take over the debtor's property. Any property of value will be sold to pay creditors. If the debtor wants to keep property, he has to execute a reaffirmation.

• Chapter 13, where the debtor keeps property, but must earn regular income and pay part of income to creditors. The court must approve a repayment plan and a budget. A trustee is appointed and will collect the payments, pay creditors, and make sure the debtor follows terms of the repayment plan.

• Chapter 12, which is like Chapter 13, but only for family farmers and family fishermen.

• Chapter 11, where the debtor may continue to operate a business, but creditors and the court must approve a plan to repay debts. There is no trustee unless the judge decides necessary; if a trustee is appointed, the trustee takes control of the business and property.

The Bankruptcy Information Sheet tells the debtor that if he already filed bankruptcy under Chapter 7, he may be able to change a case to another Chapter.

A bankruptcy may be reported on a credit record for as long as ten years. It can affect a debtor's ability to receive credit in the future.

The Bankruptcy Information Sheet explains that a discharge is a court order which states that a debtor does not have to pay debts. Some debts cannot be discharged. For example, a debtor cannot discharge debts for taxes; child support; alimony; student loans; court fines and criminal restitution; and
personal injury caused by driving drunk or under the influence of drugs. The discharge applies to debts that arose before the date of the bankruptcy filed. If the judge finds a debtor received money or property by fraud, that debt may not be discharged.

The Bankruptcy Information Sheet tells a debtor to list all property and debts in bankruptcy schedules. If a debtor does not list a debt, it is possible the debt will not be discharged.

Continue reading "Bankruptcy Information Sheet - Sacramento" »

Many borrowers are defaulting on private money loans. Borrowers who want to keep their homes will file bankruptcy to seek the protection of the automatic stay to stop creditors from foreclosing.

The automatic stay stops a creditor from collection actions until or unless the bankruptcy court grants the creditor relief from the automatic stay.

In a loan secured by real estate, the creditor can seek relief from the automatic stay by claiming the creditor is not adequately protected by equity or the debtor does not need the property as part of the reorganization according to Bankruptcy Code Section 362. When making a motion for relief from automatic stay, the creditor might need to do an appraisal of the real property to evaluate what the equity is.

The borrower who files bankruptcy might still need to pay the lender when the borrower is trying to reorganize debt and the loan is part of the bankruptcy plan. In a Chapter 13 bankruptcy filing, the borrower who files bankruptcy is obligated to make post-petition payments.

Another way for creditors to terminate the automatic stay is for them to seek adequate protection payments. Bankruptcy Code Section 361 provides the following examples adequate protection of a party's interest in property: 1) a cash payment or periodic cash payments to the extent that the party's interest declines in value as a result of the debtor's actions; 2) additional or replacement lien to the extent the party's interest declines in value as a result of the debtor's actions; or 3) other relief, as will result in the realization of the "indubitable equivalent" of an entity's interest in property. The purpose of adequate protection is to maintain the status quo.

If a private money loan is underwater, the lender might be subject o cramdown or lienstripping. Cramdown is the involuntary court imposition of a reorganization plan over the objection of creditors. Lienstripping means liens being stripped off of the debtor's assets in a Chapter 11 or Chapter 13 bankruptcy filing, when there is not enough equity in the asset, after deducting senior liens from the property's current market value, to secure the unsecured, when the lien exceeds the value of the debtor's property. According to Bankruptcy Code Section 506, a lien is a secured claim to the extent there is value in the asset it attaches. To the extent the claim exceeds the collateral value, that portion of the claim is unsecured.

Continue reading "Private Money Loan Defaults - Sacramento" »

When someone files for bankruptcy under Chapter 13 of the Bankruptcy Code, the goal is to repay some or all the debts within 3-5 years of filing. Chapter 13 is for the debtor who wants to keep an asset like a house, rather than liquidate everything in a Chapter 7. Filing Chapter 13 Bankruptcy is for a debtor who has regular income looking to adjustment or reduce debt, rather than discharge all debt.

Debts fall into three categories: secured creditors, unsecured creditors, and post-petition. Failure to pay on secured property gives creditors the right to ask for relief from the automatic stay and proceed to seize the property. Unlike a Chapter 7, discharge of debts is not immediate. The debtor needs to come up with a plan to repay certain creditors, and then after payments to those creditors are made, the case goes to discharge.

The court appoints a Trustee who collects payments to distribute to creditors. David Burchard is the Chapter 13 Trustee for the Northern District of California, San Francisco and Santa Rosa Divisions. Lawrence J. Loheit is the Chaptr 13 Trustee in Sacramento. According to his web site, Loheit is a Sacramento native, and started in bankrutpcy in 1963 as the Assistant to the Chapter 13 Trustee. In 1976, Loheit was appointed as the sole Chapter 13 Trustee, by the now deceased Chief Bankruptcy Judge, Robert E. Woodward. A Trustee has a staff of accountants and attorneys. The percentage fee collected by the Chapter 13 Trustee varies but cannot exceed 10% of the sum received in each case for payment to creditors. Each Trustee has his/her own forms on their web sites for debtors when making filings so debtors and their attorneys should make sure they obtain the correct forms.

Attorneys' fees for Chapter 13 bankruptcy filings are discussed in the Bankruptcy Code and court procedures/rules, and may be disgorged if collected upfront when an attorney does not respond to objections by the Trustee, does not show up for 341 hearings, or a case gets dismissed.

After a bankruptcy filing, the case proceeds to a 341 hearing. A 341 hearing is usually the only court appearance a debtor needs to make. The Trustee heads the 341 hearings, which require the debtor to submit tax returns and bank statements as of the date of a bankruptcy filing. A case cannot go to confirmation until the 341 hearing is complete.

At a confirmation hearing, there are three calendars: confirmed, dismissed, contested. When a plan is confirmed, there are objections by creditors. A case may be dismissed for failure by the debtor to make payments to the Trustee for distribution to creditors. In community property states, when only one spouse files bankruptcy, the other spouse needs to be aware that spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, all the community property each spouse owns jointly is part of the bankruptcy estate, regardless whether three is a filing by only one spouse. Examples of when a case may be contested include when a debtor tries to modify a plan in order to make payments, when a plan needs to be amended for missing information, or a 341 hearing is not completed.

Continue reading "Chapter 13 Bankruptcy - Sacramento" »

The following is a fictitious scenario:

Eugene Paddy is today's top daily buzz. Digg this buzz. Paddy took Mustafa Salaith's case after Stived agreed to pay. Paddy did not ask Salaith to sign a separate engagement letter or conduct written conflicts waivers. Though Salaith was the named plaintiff, Paddy emphasized Stived as his client in his law firm bio: Filed suit on behalf of client's employee who had been the victim of anonymous poster...Paddy had a thing going with Stived. That year, he billed over $2.3 million to Stived for settling two trade secret lawsuits against competitors. The substance of the disagreements involved misuse of PowerPoint sales presentations. Paddy thought he was a winner gaining $1 million in settlement proceeds for the company. What gain would the company have gotten if it invested the $2.3 million in operations instead of Paddy?Paddy lived back in the days when he was a greedy associate. Paddy padded his billings to Stived with the hours he worked on Salaith's case, and did not tell Stived auditors in legal letters. Despite public displays of good acts, Paddy chipped away his character, billing for all his fees secretly, little-by-little, over time to do favors for clients in exchange for billable hours. He used firm and clients' investors' resources to file lawsuits for clients' employees, officers, directors, working on personal injury, family, and other personal matters unrelated to clients' investors' interests and unconnected to the firm's concentration on technology and life sciences. People just did not know which "clients" paid his invoices. Investigators got caught up with him eventually: Eugene Paddy, Partner, Wally Christopher, Associate, Michael Daniels, Associate at The West Law Firm, are investigated by tax authorities, state bars, and securities regulators for nonpayment of taxes, improper periodic filings, and personal use of public investor funds.

Continue reading "A Standard Chapter 13 Bankruptcy" »

The lack of clarity of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act has generated a flurry of litigation. Another case reached the Supreme Court last week, as the Court heard oral arguments in Hamilton, Chapter 13 Trustee, v. Lanning.

The Court will address the issue of whether bankruptcy courts may look at evidence that a debtor's income and expenses differ from his/her prior income and expenses in calculating a debtor's projected disposable income. The Bankruptcy Code's means test for Chapter 13 bankruptcy filers appears to mandate that the court only look backwards to project how much a filer will be able to pay to his/her creditors. But because unemployment often spurs the bankruptcy filing, the means test often over-projects future income. Therefore, the Chapter 13 plan can set the filer up for failure.

The bankruptcy trustee argued that the means test is clear in mandating that the court only look at a filer's past. The 2005 amendments intended to remove judicial discretion in calculating the means test. Allowing courts to factor in projections is too unreliable.

The debtor countered that the means test is supposed to capture projected income, and the word "projected" requires that the court obtain a realistic approximation of future income and expenses. Such a realistic estimation compels considering evidence of what the future will be.

Unfortunately for debtors, as irrational as the means test is, the plain language is fairly certain that the court should only look backwards. Hopefully, the Supreme Court will allow common sense to govern its decision because the current law leads to many unfair results. The Supreme Court should issue its decision in the coming months.

In Chapter 13, after the debtor attends a 341 hearing, and the bankruptcy plan is filed, the next event is the confirmation hearing where the court approves the discharge of debts if there are no creditor oppositions.

The debtor is required to attend the confirmation hearing as the bankruptcy plan is reviewed by the court and Chapter 13 Trustee. If the debtor fails to appear for the hearing, the judge can prevent or delay the confirmation.

The bankruptcy lawyer for the debtor needs to present a plan that protects debtor interests by making payments manageable, that ensures the plan will be confirmed by the court. When attending confirmation hearings, review the calendars prior to entering the courtroom to stay on track with whether a case is on the dismissal, uncontested, or contested calendar. The lawyer analyzes the parties' income and expenses, and makes certain the budget is not excessive or has frivolous expenses.

When an objection to confirmation is filed, the objecting party, or its attorney, attends the confirmation hearing. The views of the objecting parties and the Trustee are heard by the judge. The judge confirms the plan, denies confirmation, or sets an evidentiary hearing on the disputed matter (e.g. a valuation issue, a bad faith objection, a disposable income objection). Often objects relate to payments offered under the plan being less than creditors would receive if the debtor's assets are liquidated or the debtor's plan does not commit all of the debtor's projected disposable income for the commitment period.

The provisions of a confirmed plan bind the debtor and each creditor. If the court confirms the plan, the Chapter 13 Trustee will distribute funds received under the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the court declines to confirm, the debtor may file a modified plan, or convert to a liquidation case under chapter 7. 11 U.S.C. § 1323. 11 U.S.C. § 1307(a). If the court declines to confirm the plan or the modified plan and dismisses the case, the court may authorize the Trustee to keep funds for costs, and return remaining funds to the debtor 11 U.S.C. § 1326(a)(2).

A discharge is provided under Chapter 13 when the debtor completely performs under the plan. The discharge releases the debtor from all debts provided for by the plan or disallowed. Creditors provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal against the debtor to collect discharged obligations.

Continue reading "Confirmation Hearing" »

As expected, the final 2009 numbers showed a spike in bankruptcy filings. There were 1.43 million bankruptcy filings in 2009, a 32 percent increase from 2008. Consistently, every month in 2009 reported bankruptcies in excess of the same month in 2008. Last month, there were 22 percent more bankruptcies than in December 2008.

The recession has caused bankruptcies to reach a level that has not been approached since 2005, when Congress rewrote the Bankruptcy Code to discourage consumers from filing bankruptcy. This year's 1.43 million filings was the seventh-highest year on record, behind 1998 and 2001-2005.

Some experts contend that the 2005 Bankruptcy Code reform has been ineffective. They attribute the decline in bankruptcies after 2005 to the healthy economy, the surge of people filing bankruptcy in 2005 to avoid the new rules, and the new rules making bankruptcy more expensive and time-consuming. The reform had intended to prevent filers from abusing the system. But, those safeguards are now costing filers more money and delaying relief to families that need protection from creditors or need to save their homes.

This year does not project much, if any, reduction in bankruptcies. Foreclosures and subprime mortgages going bust will likely continue. And many more families may be under financial stress due to unemployment and underemployment in 2009.

Under 11 U.S.C. § 547(b)(4)(A), transfers made from the debtor's estate up to 90 days prior to filing of the bankruptcy petition are avoidable by the trustee as preferential transfers. In other words, the bankruptcy trustee can undo any such transfers because they are deemed to improperly favor the recipient over other creditors.

However, under § 547(c)(4), those transfers are not preferential if the creditor made a new loan after the borrower paid off the old loan. This exception is designed to protect revolving credit arrangements. Typically, a credit card provides a borrower with a debt limit that cannot be exceeded. If the borrower pays the full balance one month, then the next month the borrower has the full credit limit at his disposal. If the borrower has not paid the full balance, then the following month he has a correspondingly less amount at his disposal to borrow.

Hence, it is unfair for the lender if payments made prior to a new loan are undone. The lender would not have offered the new loan unless it received those payments.

An illustration: John has a $1000 credit limit. He uses $600 to make purchases in Month 1 and pays off the full balance at the end of the month. In Month 2, he makes total purchases of $800 and pays off the full balance at the end of the month. In Month 3, he makes $1000 in total purchases, but does not pay off the balance and files bankruptcy. Under section 547(c)(4), John's payments at the end of Months 1 and 2 are not preferential transfers, and the lender does not have to return the payments to John's bankruptcy estate.

The American Bankruptcy Institute (ABI) reported encouraging numbers for November. Consumer bankruptcy filings dropped 18 percent from October, as there were 112,152 filings as compared to 135,913 the previous month. Chapter 13 filings held steady at 29 percent of all consumer cases.

The November numbers still represented a 12 percent increase from the previous November. Samuel J. Gerdano, ABI's Executive Director, attributes the rise to the persistently high unemployment figures and still beleaguered housing market. National unemployment remains high and many consumers are still struggling with housing debt in excess of their homes' values. Negative equity prevents homeowners from being able to refinance to lower monthly payments and to use any equity to pay down debt.

Many subprime, adjustable-rate mortgages (ARM) have yet to reset. Banks wrote an avalanche of five-year ARMs into 2007 before the credit crisis began. Bankruptcies may remain high as these mortgages switch from their low initial interest rates, and the monthly payments adjust upwards accordingly. Chapter 13 bankruptcies will also remain high, as homeowners are more likely than non-homeowners to have income and assets that preclude them from filing Chapter 7.

If you are a homeowner struggling with an ARM, then you may benefit from consulting with an experienced bankruptcy attorney.

On November 6, 2009, the New York Times reported Jason Rodriguez opened fired at his former workplace in downtown Orlando, FL. The engineer gave his life away when he randomly shot 6 people, injuring 5 and 1 dying at the scene. The shooting resulted from anger in being terminated in 2007 at an architectural firm. Rodriguez filed for bankruptcy and was working at a Subway shop.

It seemed difficult for his former employer to understand why he would still be angry at the termination, but those who have jobs, are not in debt, or are otherwise productive, may not realize angry thoughts continue to play over and over when someone is stuck at the same place for a long period of time. The unemployed today have taken much longer to find new positions, with some taking possibly over a year to land only a part-time or temporary job. It seems Rodriguez allowed an injury to go beyond its original scope, defining his self-image based on one company, but compassion is what separates a bankruptcy attorney who is an ally from one who advises only on legal proceedings. Bankruptcy is not a sign of imperfection, but an unburdening of the past, and a test in courage to face whatever comes.

Bankruptcy proceedings are governed by federal law - the Bankruptcy Code, found at Title 11 of the United States Code. Title 11 contains numbered chapters that define eligibility to Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15.

Chapter 7 can be used by both businesses and consumers to liquidate assets to pay creditors. A Chapter 7 debtor cannot reorganize, emerging from bankruptcy with restructured debt. In Chapter 7, upon the filing of the proceeding a trustee oversees the liquidation of the debtor's assets. The trustee is chosen randomly from eligible panel trustees in the district where the case is filed. For a business, the trustee takes over control and oversight from an entity's board and leadership team. For a voluntary bankruptcy, there is little chance for payment of creditors.

Chapter 9 provides for reorganization of a municipality like Vallejo, CA and perhaps Pacific Grove, CA.

Chapter 11 refers to the business reorganization chapter of the Bankruptcy Code. Unlike Chapter 7, in a Chapter 11, the company's management and board remain in control of the process. A company continues to operate post-filing. No trustee is appointed in most Chapter 11 proceedings, but bankruptcy court approval is necessary for many operational decisions. Chapter 11 by a business does not necessarily mean that it will reorganize. Many Chapter 11 cases begin with an immediate sale of substantially all of the debtor's assets (a liquidation), commonly known as 363 sales. After substantially all of the assets are sold, Chapter 11 proceedings may end with court approval of a reorganization plan.

A reorganization plan is provides for payment of creditors and interest holders in accordance with the Bankruptcy Code. The plan may involve distributing proceeds to creditors after a liquidation sale, restructuring debts, and continued operations. The plan offers creditors an opportunity to review and take a position as to property distribution and future operations of the debtor.

Chapter 12 is limited to family farmers and fisherman, Chapter 13 is limited to consumers, requiring the consumer debtor to repay some amount to creditors. A business is not eligible for Chapter 13. Chapter 15 deals with cross-border insolvencies.

Continue reading "Bankruptcy Reorganization or Liquidation" »

On Tuesday, the Supreme Court heard two cases that could significantly impact bankruptcy law. Besides hearing arguments about the dischargeability of student loan debt in bankruptcy, the U.S. Supreme Court heard a second case challenging the validity of provisions of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). One rule prohibits lawyers from recommending that assisted persons, who are individuals with primarirly non-exempt consumer debts, take on additional debt. Another requires that attorneys who offer bankruptcy advice must advertise as debt relief agencies.

A Minnesota law firm challenged the provisions as violating lawyers' First Amendment rights, ethical duties to provide legal advice, and responsibility to not provide misleading advertising. The firm's stance is that 11 U.S.C. section 526(a)(4) is overbroad and wrongfully prevents attorneys from providing sound legal advice to clients. For instance, the law, which prohibits advising assisted persons to incur more debt, may prevent an attorney from advising a potential bankruptcy filer to sell his overly expensive home and rent an apartment because the lease would be additional debt.

The firm also argued that Congress did not intend for 11 U.S.C. section 528, which requires that debt relief agencies disclose in advertisements that they are debt relief agencies, to apply to bankruptcy attorneys because Congress designed the law to regulate behavior by non-attorney bankruptcy providers. The firm's attorney made the point that If Congress wanted the law to apply to attorneys the law's language would explicitly include attorneys.

The justices appeared to view section 526(a)(4) unfavorably and Justice Scalia even repeatedly referred to it as "a stupid law." On the other hand, a few justices treated the firm's position on section 528 skeptically. The Supreme Court will likely hand down a decision towards the beginning of 2010.

On Tuesday, the Supreme Court heard oral arguments in a case that could provide more clarity to what circumstances qualify as "undue hardship." Finding undue hardship is a requirement to permitting a bankruptcy filer to discharge student loan debt.

Over two decades ago, Francisco Espinosa took out $13,000 in student loans to go to an Arizona trade school to learn computer drafting. After four years, he graduated but could not find a job. He wanted to get married but first wanted to make sure his finances were in order. Without little recourse to pay back the debt, he called a lawyer. The attorney filed a Chapter 13 bankruptcy and drafted a plan that would pay back the original student loan principal but not repay the $4,000 in accrued interest. Although the lender, United Student Aid Funds, Inc., was notified about the bankruptcy, it did not object, and a bankruptcy judge approved the plan.

Espinosa made payments on the Chapter 13 plan, and after five years in 1997 the bankruptcy court declared the debt paid in full. Espinosa thought that was the end of the story, but two years later United started demanding that Espinosa pay the interest. Then, in 2003, eleven years after the bankruptcy court confirmed the original payment plan, United claimed that the original plan was illegal and void because the bankruptcy code only allows discharge of student loan debt if the borrower shows undue hardship.

The Ninth Circuit Court of Appeals in San Francisco ruled against United because of the multiple notifications it received and its failure to object to Espinosa's plan. United appealed and the U.S. Supreme Court took the case.

In front of the Supreme Court, the Justice Department, siding with United, argued that the "undue hardship" requirement ensures that student loan debt is not routinely discharged. This policy helps ensure that lenders continue to offer student loans, even to those with weak credit.

In rendering their decision sometime in the next few months, the justices must rule on Espinosa's fact-specific scenario and also indicate to lower courts how to approach undue hardship arguments. The decision may have significant ramifications for the lending industry and the millions who hold student loan debt.

The Center for Responsible Lending is advocating a change to bankruptcy laws that would allow bankruptcy judges the ability to rewrite mortgage terms. The Center's position appears even more necessary in light of loan servicers' inability to permanently modify mortgages under the federal Home Affordable Modification Program.

Rewriting bankruptcy law to provide bankruptcy judges discretion to unilaterally impose revised mortgage terms is not a revolutionary idea. Bankruptcy judges can rewrite debtors' terms on many secured loans, most notably car loans. Due to lenders' powerful lobbying efforts, when Congress enacted the Bankruptcy Code in 1978, an exception was inserted into 11 U.S.C. section 1322(b)(2) that prevented bankruptcy judges from modifying first mortgages. Thus, even if a home is worth significantly less than the mortgage amount, the bankruptcy judge cannot revise the principle to the fair market value. The judge cannot affect the monthly payment either.

Ideally, providing bankruptcy judges the power to revise mortgage principal and montly payments would be unnecessary. The Home Affordable Modification Program was supposed to make it substantially easier for borrowers to work out loan modifications with lenders. However, while the Program has spurred 650,000 trial modifications, few have been converted into new permanent mortgages.

Extending bankruptcy judges' powers would provide borrowers a last, but potentially very effective, resort to stay in their homes if their lenders and servicers are unresponsive. Unless the Home Affordable Modification Program is more successful, Congress should take a look at following the Center for Responsible Lending's recommendation.

As a result of a bankruptcy filing, an automatic stay prohibits creditors from seeking to take certain actions outside the bankruptcy proceedings to collect amounts due to them from the debtor which arose prior to the filing of the bankruptcy petition. Notwithstanding, a creditor may be entitled to take certain legal action to obtain relief from automatic stay.

For example, if a creditor is a supplier who shipped products received by the debtor within forty-five (45) days prior to the bankruptcy filing, a creditor might submit a timely written reclamation demand to recover possession of goods, or at the debtor's option, receive a higher priority administrative claim as to the products when opposing an unsecured claimant, thus increasing payment.

Another example is for a creditor to file a motion with the court to obtain relief from automatic stay by explaining the asset as a depreciating asset that will lose its value if the court does not allow the creditor to take back the asset to resell. The Bankruptcy Code allows the court to grant relief from automatic stay for cause when there is lack of adequate protection of an interest in property, if a debtor does not have any equity in the property, or if the property is not necessary for an effective reorganization of debtor. This usually occurs in the event of assets like cars where a debtor is no longer able to pay loan payments towards the car purchase.

In a recent case decision, Dumont v. Ford Motor Credit Company, 581 F.3d 1104 (9th Cir. (Cal.) Sep. 15, 2009), the Ninth Circuit Court of Appeals confirms the Bankruptcy ode does not protect a debtor's personal property if the debtor fails to commit to redeem, reaffirm or assume the underlying loan. According to Bankruptcy Code Section 362(h)(1)(A), a debtor has to file a Statement of Intention and indicate whether debtor will surrender or retain the property. If the debtor retains, the debtor is required to elect to redeem, reaffirm or assume the underlying loan. Otherwise, the automatic stay is terminated and the vehicle is no longer property of the bankruptcy estate, allowing the creditor to attempt repossession of the vehicle.

When doing business, a company should be wary of customers' credit to prevent becoming a potential creditor of a bankrupt estate. A company should watch out for publications on bankruptcy filings to ensure that it timely files any claims and meets deadlines for relief from automatic stays.

Continue reading "Relief from Automatic Stay" »