Understanding Consumer Bankruptcy

Scott B. Kuperberg

• Publisher: Business Expert Press
• Year: 2015
• ISBN:
  9781631572494
• Topic: Commerce
• Subtopic: Droit des affaires

Any company that does business with consumers will find itself in bankruptcy court at some time during the life of the company. If you are the owner or manager of a business, you know the reality and need to understand how a customer's bankruptcy case will impact your business. Consumer bankruptcy filings have increased dramatically in the last 10 years. Businesses need to understand the bankruptcy process from the position of a creditor facing a consumer debtor. This book will provide an overview of the most common forms of consumer bankruptcy, including a timeline of events, and the creditor's interaction with the various parties along the way. We will also go through the forms every creditor will see in a bankruptcy case, and break them down so a business owner can understand what they're reading. We provide guide points for discussion with the business's attorney. Also see strategic tips and points for maximizing returns through best business practices. Several different industries are covered, including consumer lenders, vendors, community associations, and landlords.

Chapter I

What Is Bankruptcy and Why Are We Here?

Bankruptcy is a legal process that takes place within the federal court system. The purpose is to help people and businesses that are insolvent get relief from impossible-to-pay debts. Bankruptcy is meant to be a last resort. When a debtor has tried everything to make money to continue to pay debts and maintain their business or basic living standard, and failed, the debtor can turn to the bankruptcy court for protection from creditors and to unwind their financial situation.

People and entities can file for bankruptcy protection, meaning, human beings and corporate entities like corporations, limited liability companies, and every other entity that various state laws allow. We will distinguish between consumer bankruptcy, cases where the debtor is a person (with or without their small business), and business bankruptcy, cases filed by corporate entities. We will deal only with consumer bankruptcy.

The two most common types of consumer bankruptcy are Chapter 7 and Chapter 13. This refers to Title 11, Chapter 7 and Chapter 13 of the Code. It’s written as 11 U.S.C. § 700, et seq., or 11 U.S.C. § 1300, et seq. on the various bankruptcy forms you’ll see. Chapter 7 is personal liquidation of assets. Chapter 13 is personal reorganization. Chapter 7 also covers certain small businesses below a financial threshold that are liquidating. As a business owner, you will often see a personal Chapter 7, either just with an individual customer or coupled with the debtor’s small business.

•  Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

The BAPCPA was an overhaul of existing bankruptcy laws. It had two purposes: (1) to give debtors additional protection from creditors, freeing them from debts that were previously nondischargeable, and (2) to all but require debtors to give up their home in the event of a bankruptcy. The BAPCPA was and remains controversial. The hope was to make a system that was fairer to both debtors and creditors. Some feel that creditors got the bulk of the benefit. The heavy standards on debtors to keep their homes were a boon to the lending industry.

•  THE MOST IMPORTANT RULE FOR CREDITORS

I put this at the head of the book for a reason. In my opinion, it is the first, and the most important, law every bankruptcy creditor needs to know. Once the bankruptcy case is filed (not when you’re notified, when it’s actually filed) an automatic stay goes into effect. This means that the creditor can take NO ACTION to collect an outstanding debt that was incurred prior to the case being filed (11 U.S.C. § 362(a)). “No action” includes essentially everything imaginable: no phone calls, no bills, no demand letters, no seizure, and definitely no filing a lawsuit. If a lawsuit is already pending in the state or federal court, the lawsuit is frozen in place until the bankruptcy case is resolved. Violating the automatic stay carries hefty financial penalties, sometimes tens of thousands of dollars for wanton creditors (11. U.S.C. § 362(k)). See, for example, Hubbard v. Fleet Mortgage Co., 810 F.2d 779 (8th Cir. 1987), upholding a fine of over $7,000 in damages, plus attorney’s fees, plus cancellation of the mortgage, in contempt action against a creditor for violation of the automatic stay. So beware.

Chapter II

The Cast of Characters: The Players of the Bankruptcy Drama

Now that we know the basic framework of bankruptcy law, it’s time to meet the various parties involved in a bankruptcy case and understand their roles in the process.

Debtors and Creditors

Debtors and creditors are the stars of the bankruptcy show. The debtor is sometimes called the petitioner, since they file a bankruptcy petition to open the case. The debtor is the subject of the bankruptcy: the party that is either liquidating or restructuring their debts. The creditor is any party that has a claim for a debt or obligation from the debtor. The debtor may owe the creditor for a past due or current debt, or may be under an obligation pursuant to an agreement (installment contract, lease, or mortgage) to pay the creditor in the future.

Debtors and creditors can be individuals, corporations, LLCs, partnerships, or even municipalities. Creditors can also be any of these types of entities.

The Bankruptcy Trustee

Once the bankruptcy case is filed, all of the debtor’s assets become the “bankruptcy estate” (11 U.S.C. § 541). The estate has a trustee to manage its affairs and make sure the debtor is complying with the bankruptcy law. Each federal court district has a bankruptcy trustee, who is hired by the federal government. In most districts, the trustee has a team of attorneys that represent the trustee’s office and serve in court on the trustee’s behalf. In districts with large populations, the trustee’s primary role is as an administrator of the trustee’s office. The trustee herself will get personally involved only in major cases.

What does the trustee do? The trustee reviews the debtor’s petition and schedules (documents filed with the bankruptcy petition) to make sure they comply with the applicable bankruptcy chapter. The trustee will review the debtor’s finances to see if they are eligible to file bankruptcy, and if they have made a complete disclosure of all their assets, income, and debts. Most important, the trustee ascertains what assets the debtor has available to sell and pay off debts.

The trustee does this through review of the bankruptcy petition and schedules, and by holding a meeting called the 341 Meeting of Creditors (sometimes called the 341 hearing or 341 meeting). The trustee also has to determine whether the assets are encumbered, meaning a creditor already has a financial interest or lien in the particular asset, or whether the asset is “exempt.” Exempt assets are belongings that the debtor gets to keep after the bankruptcy case is over (11 U.S.C. § 522). They’re not subject to sale. Exempt assets are determined by state law.

In cases of suspected bankruptcy fraud, a special attorney from the United States Trustee’s Office (not the local district) may get involved. Bankruptcy fraud is a very serious crime, and the U.S. Trustee will investigate and prosecute anyone defrauding creditors or the trustee to the fullest extent of the law.

The trustee does not represent the debtor or creditors, although you may find a trustee friendly to one side or the other. They represent the U.S. government and are tasked with making sure the estate is administered according to the letter of the law.

The Bankruptcy Judge

This is someone you don’t see very often. The judge holds hearings and trials when the debtor, creditor, and trustee are unable to resolve matters themselves. The community of bankruptcy attorneys is a small one, and all of the players in a particular district tend to know each other and know how to resolve disputes. The judge only steps in when something goes wrong. To give you an idea of how rare that is, in the Northern District of Georgia, Rome Division (a rural area of North Georgia), there are typically 320 cases on the court’s hearing docket each week. No more than two or three require a hearing before the judge. I once met a bankruptcy attorney who, despite being in bankruptcy court every week, had not argued before a judge in 20 years!

When the judge is called upon to hear a case or motion, the judge does what all judges do: hear the evidence and legal arguments, and decide which evidence gets admitted and which does not, and ultimately renders a decision.

Chapter III

Bankruptcy: It’s a Process

You’re trying to run a business and you want the bottom line, how long will this take? What are the steps in bankruptcy and what should we do along the way? I’ll give you the answer all lawyers give: it depends. The first factor is what chapter you’re dealing with. Chapter 7 cases are usually much faster than Chapter 13. But Chapter 13 cases are more likely to fall apart before they even get started.

Chapter 7

A Chapter 7 bankruptcy is when the debtor is liquidating his assets to pay off debts. Whatever debts cannot be paid off are discharged and no longer have to be paid. On the short end, a Chapter 7 bankruptcy could take as little as four months. If there are assets that have to be administered, a case could take a year and a half or longer.

• Step One—The Case Begins

The case begins wi...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Abstract
• Contents
• Disclaimers
• Preface
• Acknowledgments
• Introduction
• Chapter I: What Is Bankruptcy and Why Are We Here?…
• Chapter II: The Cast of Characters: The Players of the Bankruptcy Drama
• Chapter III: Bankruptcy: It’s a Process
• Chapter IV: Creditors and Their Attorneys, Is This Really Necessary?
• Chapter V: Your Rights and Duties as a Creditor
• Chapter VI: Petitions, Schedules, and Forms: Understanding the Many Documents of a Bankruptcy Case
• Chapter VII: Case Studies and Best Practices for Your Industry
• Chapter VIII: Post-Bankruptcy–The Relationship Continues?
• Chapter IX: In Case You Were Wondering
• Conclusion
• References
• Index
• Adpage
• Backcover