10 Things about Bankruptcy for Collection Professionals

By Robert S. Bernstein, Esq.
Published by the Credit Research Foundation’s “CRF News.” To view the printed article, CLICK HERE.

1.)  Chapter 11 Process

A debtor commences a chapter 11 case by filing a petition for relief under chapter 11 of the Bankruptcy Code, along with its Schedules and Statement of Financial Affairs.  Once the petition is filed, the debtor becomes a debtor-in-possession with all of the obligations and powers of a chapter 11 trustee.  In some instances, a chapter 11 trustee may eventually be appointed, taking this power and authority away from the debtor.  During the chapter 11 bankruptcy process, a debtor-in-possession can employ professionals, such as attorneys, accountants, appraisers and auctioneers, to help it navigate the chapter 11 case.  All payment for such professionals can only be made after Court approval.

2.)  Committee of Unsecured Creditors

The Committee of Unsecured Creditors generally only exists in a chapter 11 bankruptcy case.  Three to seven unsecured creditors are appointed by the Office of the United States Trustee to sit on a committee to provide oversight and guidance to the case.  The Committee members are usually selected from the debtor’s 20 largest unsecured creditors, but in very large or complex cases, a smaller creditor may also be chosen to provide more diversity to the Committee.  Committees also have the right to hire counsel and other professionals, whose fees are paid for by the debtor as administrative expense claims and by the individual members of the Committee.  Committees are often most important in smaller chapter 11 cases rather than larger cases.

3.)  Automatic Stay and Adequate Protection

The automatic stay, pursuant to Section 362 of the Bankruptcy Code, invokes a stay on all proceedings against the debtor related to collecting debts or enforcing a claim.  The automatic stay is limited, but does relate to state court actions or foreclosure proceedings against the debtor or property of the debtor’s estate.  Many courts, however, hold that the filing of a mechanic’s lien does not violate the automatic stay.

One of the trustee’s or debtor-in-possession’s paramount duties is its obligation to provide and maintain the value of a secured claim’s collateral.  If this adequate protection can not be provided, either by maintaining the property or by making adequate protection payments, the secured creditor will be entitled to relief from the automatic stay to pursue its rights and remedies outside of bankruptcy court.

4.)  Claims Process

When the debtor files its petition for relief under the Bankruptcy Code, it is required to file its Schedules listing all known secured and unsecured creditors.  Once a creditor receives notice of the debtor’s bankruptcy filing, and even if a creditor is listed on the debtor’s Schedules, best practice is for the creditor to then file a Proof of Claim on the debtor’s claims register.  A creditor’s claim can be discharged even if the creditor had no notice or knowledge of the bankruptcy case so therefore it is best to actively pursue the claim and participate in the bankruptcy process.

5.)  Unexpired Leases and Executory Contracts

A powerful tool for a debtor under the Bankruptcy Code is the ability to reject or assume unexpired leases and executory contracts.  An executory contract is one wherein the failure of one party to perform its obligations would excuse the performance of the other party, and the outstanding obligations are not solely for the payment of money.  If the debtor assumes a lease or executory contract, the debts arising therefrom are not discharged, and the debtor must cure any prepetition defaults.

6.)  Chapter 11 Plan

The debtor or debtor-in-possession must file a plan of reorganization or liquidation, with an accompanying disclosure statement.  The disclosure statement must provide adequate information, measured against a typical debtor that provides creditors with enough information so that they can make an informed decision regarding the plan.  Creditors may object to the adequacy of the information provided in the disclosure statement.  The debtor must obtain court approval of the disclosure statement before it can ballot the plan for acceptance by the creditors.

7.)  Administrative Expense Claims

A creditor can get a claim approved as an administrative expense claim for “actual and necessary costs of preserving the estate.”  This can include the debtor’s and Committee’s professionals’ fees, as well as post-petition payments to creditors.  Section 503(b)(9) of the Bankruptcy Code also defines an administrative expense claim to include claims for the value of any goods received by the debtor within 20 days before the date of commencement of a case in which the goods have been sold to the debtor in the ordinary course of business.  The key issue for proving a 503(b)(9) claim is when the goods were “received” and the actual “value” of the goods.

8.)  Preference Actions

Pursuant to sections 547 and 548 of the Bankruptcy Code, the trustee or debtor-in-possession can avoid and recover payments made to creditors within 90 days before the date of commencement of the case.  Debtors will often send demand letters before filing a complaint to commence an adversary proceeding.  Creditors should never pay when they receive that demand letter; often, creditors have valid defenses to this demand and an attorney can assist in negotiating a settlement for a much lesser value.

9.)  Involuntary Bankruptcy

Involuntary bankruptcy cases can be commenced by the creditors of the debtor pursuant to section 303 of the Bankruptcy Code, and are often the creditors’ friend.  If a debtor has 12 or more creditors, a case can be commenced by three creditors holding a total of $15,325 or more of unsecured claims.  If a debtor has less than 12 creditors, one creditor holding more than $15,325 of unsecured claims can commence a case.  These claims must not be the subject of a bona fide dispute as to liability or amount.

10.) Bankruptcy Discharge

Certain debtors, such as individuals in a chapter 7 bankruptcy case, are eligible for discharge.  This achieves the purpose of bankruptcy, providing the debtor with a fresh start after discharging all of his or her debts.  The debtor is released of all liability for certain debts, and is no longer required to pay any debts that have been discharged.  A corporation or other entity is not eligible for a discharge, but can eliminate debt through a Chapter 11 Plan.

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