Technology and Bankruptcy/Creditors' Rights

by Debra Hindin-King

Did you know bankruptcy is not intended to give debtors an unfair advantage over creditors? Nor is it intended to protect people who have acted deliberately to cause harm to others. But bankruptcy is intended to help people get a "fresh" start after some event, or series of events, has left them in financial straits.

A debtor must have resided in the district for 180 days prior to filing bankruptcy. A debtor cannot be a banking institution or stockbroker.

A creditor is an entity with a claim against the debtor that arose prior to the time that the debtor filed the bankruptcy petition. A creditor with a secured claim is secured by a lien on property in which the bankruptcy estate has interest. The claim can only be secured to the extent of the value of the creditor's collateral. A creditor with an unsecured claim is not secured by any collateral or given priority under the Bankruptcy Code.

After a bankruptcy petition is filed, the bankruptcy court will mail a notice to all creditors listed in the petition. About a month after a case is filed, there will be held a meeting of the creditors known, after its Bankruptcy Code section name, as a "341 meeting." At this time the creditors have an opportunity to inquire further of the debtor about possible repayment of the unpaid debt.

The following debts are nondischargeable under 11 U.S.C. § 523:

• debt obtained under false pretenses
• debt neither listed nor scheduled under § 521(1)
• debt obtained by fraud, embezzlement or larceny while acting in a fiduciary capacity
• child support
• fines and compensatory penalties payable to a government entity
• consumer debts owed to a single creditor larger than $1000 for luxury goods and services incurred within 60 days of filing
• cash advances aggregating more than $1000 within 60 days of filing
• administrative fees (reasonable and necessary costs associated with preserving the estate, including wages, salaries, attorney fees, accountants)
• IRS taxes due and owing (usually limited to those due within three years prior to the bankruptcy)
• student loans

A bankruptcy paralegal assisting an attorney who represents a creditor client should discuss at least three issues during the first meeting. First, the creditor needs to understand the debtor's case. Second, the creditor needs to be advised how to assert a claim in bankruptcy. Third, with assistance from the attorney, the creditor needs to formulate a strategy for maximizing the prospects of recovery.

Following is a short checklist for successful creditor representation:

1. Identify the debtor and any related entities.
2. Identify other major creditors (possible conflicts).
3. Determine the amount owed, terms of repayment, and interest rate.
4. Determine if the debt is secured by a promissory note, contract, or other written document. If not, what other evidence supports the existence and amount of the debt?
5. Is the debt secured, unsecured, or in default or dispute?
6. Does the debt constitute a "nondischargeable" debt?
7. What are the debtor's assets and value?
8. What is the anticipated payout to unsecured creditors?
9. Has the case been filed in good faith?
10. Is the security interest properly perfected?

A creditor typically asserts and preserves a claim against the debtor by filing a Proof of Claim in the bankruptcy court. In a Chapter 7 liquidation or Chapter 13 adjustment of debt, an unsecured creditor must file a Proof of Claim within 90 days after the first meeting of the creditors (the § 341 meeting). Secured creditors need not file a Proof of Claim to preserve a claim, but, as a matter of creditor procedure, it may be in the best interests of the creditor to do so.

In a Chapter 11 reorganization, the schedule of assets filed by the debtor is considered evidence of the validity and amount of claims of those creditors, and claims are thus deemed allowed unless they are also listed as disputed, contingent or unliquidated liabilities. Any creditor or equity security holder who claims an interest that is not scheduled or is scheduled as disputed must file a Proof of Claim within the time set by the court.

What is adequate protection for the creditor? Generally, there must be value in the collateral property, or other suitable protections for the creditor, to protect against

1)   decrease in the value of its collateral,
2)   use of and dissipation of the collateral, such as inventory and raw materials, or
3)   complete loss or casualty to the collateral by fire or theft.

A secured creditor is entitled to adequate protection of its position. If demanded by a creditor, a trustee must prove adequate protection for the creditor exists.

To determine whether or not a secured creditor is adequately protected, you need to ascertain how much "equity cushion" the creditor has to protect its position. The "equity cushion" is defined as the "value in the property above the amount owed to the creditor with a secured claim." The secured creditor that is undersecured holds collateral with a value less than the claim as of the date the debtor filed the petition.

The secured creditor may obtain relief from the automatic stay provisions of the Bankruptcy Code to commence or continue a replevin or foreclosure action by demonstrating to the Court that

1. debtor does not have equity in the property serving as security,
2. the property serving as collateral is not necessary to an effective reorganization, and
3. lack of adequate protection.

An involuntary case may be commenced under Chapter 7 or 11 against a person by three or more entities, each of which is a holder of a claim in the aggregate of at least $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders. The court may require a bond by petitioners to indemnify the debtor. The case can be dismissed on motion to preserve property of the estate.

A debtor also has a right to reaffirm a debt through written agreement between the debtor and creditor prior to the granting of a discharge of debt. The debtor has 60 days after the bankruptcy petition is filed with the Court to rescind the agreement. The agreement is binding when filed with the clerk of the bankruptcy court. The reaffirmation agreement gives up protection of the bankruptcy discharge of debt, and the creditor may take property or wages if the debtor does not comply with the agreement.

The creditor also has the right to commence an adversary proceeding by filing a complaint against the debtor 60 days after the 341 meeting regarding the dischargeability of specific debt. If the creditor fails to have the court determine whether a debt is nondischargeable, the court can award costs to the debtor.

Following is a short checklist for representation of a secured creditor.

1. Determine value of creditor's collateral and whether it has a security interest in cash or other assets that may be converted into cash after filing.
2. Determine if the creditor is subject to lien voidance under § 522(f) or (h).
3. Determine if the creditor commenced or completed foreclosure proceedings prior to the filing of the bankruptcy filing.
4. Assess whether the creditor is experiencing hardships caused by the automatic stay.

To understand and research creditors' rights further, check out the web sites listed:

Always remember to check NFPA's web site at www.paralegals.org for further research tools related to bankruptcy law.

In the late 1980s, Debra Hindin-King was a deputy clerk for the U.S. Bankruptcy Court for the District of Colorado. In writing her column for this issue, she has enjoyed updating her understanding of bankruptcy law through the use of technology in the new millennium. She is now a litigation legal assistant at Holland & Hart LLP in Denver, CO, and Technology Coordinator for NFPA.