Creditors’ Rights in Bankruptcy
"FAILURE IS NOT AN OPTION."
Creditors' rights are instantaneously impacted by the filing of a bankruptcy petition. Upon receipt of notice of a bankruptcy filing, it is of paramount importance for the creditor to quickly identify the specific type of relief being sought by the debtor, and in response thereto, determine what rights may be available to the creditor within the context of the debtor's bankruptcy case. The creditor must then act proactively to protect and prosecute those rights within the bounds of bankruptcy law and procedure. These rights include, but are not limited to, the right to share in any distribution from the bankruptcy estate (if available and depending on the chapter under which the bankruptcy petition was filed), the right to challenge a debtor's plan of reorganization, and more broadly, the right to challenge the debtor's right to a general discharge or discharge of a particular debt.
There are numerous rigorous deadlines imposed by the bankruptcy court within which creditors are required to take certain actions to preserve their rights. A creditor's failure to strictly adhere to these deadlines, even if by reason of mistake or inadvertence, can lead to devastating results. For example, a so-called "proof of claim" must be timely filed if a creditor is going to be paid out of non-exempt assets of a bankruptcy estate. The claim must be supported by attaching copies of any contracts or judgments concerning the claim, or a summary of the claim, if the supporting documents are voluminous to the proof of claim form.
Another deadline is imposed upon creditors who seek to file an action in the bankruptcy court to determine the creditor's right to challenge the right to receive a discharge in general or the debtor's right to discharge the debt owed to that particular creditor. This process of mounting a challenge is accomplished through what is commonly referred to as an "adversary proceeding." Yet another deadline is set for creditors who wish to contest the legitimacy of a debtor's reorganization plan under Chapter 11 or 13 where certain assets have been concealed, transferred, or undervalued, or who wish to contest the feasibility of the reorganization plan where the debtor is unrealistic about the prospects for its success.
Aside from being cognizant of certain deadlines imposed upon creditors in a bankruptcy case, the creditor must deal with the so-called "automatic stay" that goes into effect immediately upon the filing of a petition under Chapter 7, 11 and 13. The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by creditors on any debt or claim that arose before the filing of the bankruptcy petition. However, if a creditor believes that it qualifies for relief from the stay, it may seek such relief by filing a motion. For example, in the context of Chapter 7 and Chapter 13 cases, a secured creditor (typically a bank or credit union holding a lien on a motor vehicle or mortgage on real estate) must file a motion for relief from the automatic stay notwithstanding the fact that the debtor indicates his or her intention to voluntarily surrender the asset. It seems counterintuitive that a creditor would need the permission of the bankruptcy court judge to take back its collateral if the debtor is willing to turn it over voluntarily, but this is what the law requires. The need to file a motion for relief also arises when the debtor expresses the intention and desire to keep the asset, yet fails to make the requisite installment payments due after filing the bankruptcy petition, or in the context of a Chapter 13 case, the debtor fails to make payments on so-called "pre-petition arrearage" through the Chapter 13 plan. It is not only secured lenders, however, who need the assistance of counsel in seeking relief from the automatic stay. Landlords who wish to evict a tenant while that tenant is involved in an active bankruptcy case need relief from the automatic stay in order to resume or institute state law eviction proceedings.
Chapter 13 plans for those debtors wishing to "reorganize" should be carefully scrutinized by creditors as failure to do so may result in irreparable harm. In a Chapter 13 bankruptcy case, the debtor must file a proposed Chapter 13 plan in "good faith," that is, the debtor must be honest regarding the facts of the case and not engage in fraud or concealment of assets. In formulating the plan, the debtor is required to devote all "disposable income" to repaying creditors. Disposable income is defined as "current monthly income received by the debtor is less than amounts reasonably necessary to be expended for the debtor to provide for the debtor and any dependents." Current monthly income is defined as the debtor's average income received over the six months prior to the bankruptcy filing. Through the Chapter 13 plan, some creditors are entitled to receive 100% of the debt owed, while others receive a much smaller percentage, and in certain circumstances, nothing at all. The plan must be filed within 15 days of the filing of the case, and the debtor must commence making proposed plan payments to the Chapter 13 Trustee within 30 days.
The length of the plan that the debtor must propose is commonly referred to as the "commitment period." The commitment period is determined by whether the debtor's income is above or below the state median income. If above, the commitment period must be five years. If below, the debtor may limit the commitment period to three years. In all instances, a creditor must not receive less than what they would receive in a liquidation of the debtor's assets in a Chapter 7 bankruptcy case. The debtor must make all of the Chapter 13 plan payments in order to successfully complete the plan and receive a discharge.
The plan is initially characterized as a "proposed" plan because all creditors (and the Chapter 13 Trustee) have the right to review the plan to determine if an objection should be lodged. In addition, the plan must be "confirmed" by a bankruptcy court judge before it is considered permanent and enforceable. Prior to confirmation, the debtor's plan is merely a proposal and interested parties may object to its terms at any time prior to confirmation. A creditor may object to the plan on various grounds, including, but not limited to, the following:
- The plan does not appropriately treat the creditor's claim, e.g., inappropriately proposes to "cram down" or "strip off" a secured party's interest;
- The plan undervalues a secured party's collateral;
- The plan contains incorrect information regarding debt arrearage;
- The plan fails to provide for sufficient payments to creditor as a result of an understatement of income and/ ]or an overstatement of expenses; and
- The plan is not "feasible" (meaning that the plan does not have a reasonable possibility of success as the debtor is relying upon "highly dubious" or fallacious sources of income to support payments called for by the plan).
D. Baker Law Group, P.C. stands ready to perform the vital function of protecting and advancing creditors' rights in bankruptcy cases under all chapters of the United States Bankruptcy Code. From filing motions for relief from stay to objecting to chapter 13 plans to filing adversary proceedings to stop a dishonest debtor from obtaining a discharge, the Firm can provide the client with the peace of mind knowing that all of the proverbial bases of being covered.