Bankruptcy 101 for Bankers

Transcription

1 Bankruptcy 101 for Bankers BAKKE NORMAN L A W O F F I C E S

2 Presentedby: Thomas R. Schumacher & Deanne M. Koll Thisoutlineisdesignedtoprovidebasicinformationaboutbankruptcy. Italsocontainsspecificinformationabouttheuniquechallengesand considerationsofbankruptcyasitappliestobanksascreditors. Thetopicsaddressedinthisoutlineinclude What are the different types of bankruptcy? What is included in the bankruptcy estate? What is the automatic stay? Why should I have the debtor reaffirm the debt? What information is important on the notice of bankruptcy filing? How does a bankruptcy affect a foreclosure? Disclaimer:Thisoutlineisdesignedtobeeducationalandinformative,butitisnot legaladvice.thelawandbankruptcyconceptscontainedinthisoutlineareaccurate today.however,bankruptcylawisconstantlyevolvingandsubjecttochange.each

3 situationisunique,andeachbankruptcyshouldbeaddressedtofittheunique situation.

4 Whatarethedifferenttypesofbankruptcy? TheBankruptcyCodeisdividedinto chapters. Chapters7,9,11,12,13and15 containthesubstantiveprovisionsthatgovernreliefinaparticularcase.themost commonformsofbankruptcy andthemostcommonformyouwillseeas bankers arechapter7andchapter13. Chapter7 In Chapter 7 sometimes called straight bankruptcy the bankruptcy trustee liquidates the debtor s non-exempt assets to pay creditors. Chapter 7 bankruptcies are what most of the population thinks of when they think of bankruptcy. A trustee is appointed as soon as the case commences. The trustee collects the debtor s property, excepting the exempt portion, and supervises the liquidation of that property. The trustee has the power to invalidate certain types of both prepetition and post-petition transfers of the debtor s property, to avoid certain liens and to contest creditor s claims. The trustee is also required to distribute the cash proceeds of the estate property to the various creditors in the order of their priority as defined under the Bankruptcy Code. Frequently, in Chapter 7 bankruptcies, there are no non-exempt assets for distribution. Thus, unsecured creditors receive nothing. Successful completion of a Chapter 7 case discharges debt incurred before the case was filed. Chapter13 In a Chapter 13 bankruptcy sometimes called a reorganization bankruptcy or wage earner bankruptcy the debtors may retain non-exempt assets and pay creditors from future income. The goal in enacting the Chapter 13 bankruptcy was to provide an incentive for people to avoid Chapter 7 liquidation and to attempt to pay at least some creditors. Debtors might choose a Chapter 13 bankruptcy for many reasons: Topaynon dischargeabledebtsovertime Toforcereinstatementofamortgage Tostripliensonpropertyownedbythedebtor InChapter13cases,debtorspayincomeoveraspecifiedperiodaccordingto acourt approvedplan.

5 A Chapter 13 trustee oversees the case but with a different role from the Chapter 7 trustee. In a Chapter 13, the trustee evaluates the plan for confirmation purposes. Once confirmed, the trustee receives plan payments from the debtor and distributes them according to the plan. In a Chapter 13 bankruptcy, the debtor must devote his or her disposable income over the life of the plan to pay unsecured debts. Successful completion of a Chapter 13 case discharges debts incurred before plan confirmation. Chapter11 YoumighthaveaclientwhofilesaChapter11.AChapter11isintendedfor reorganizationofbusinesses,butitisalsoavailabletoindividuals.achapter 11 sbasicdesignissimilartothatofachapter13,butchapter11isunique initsbusiness specificproceduresandformsofrelief. Chapter12 A client will possibly file a Chapter 12. A Chapter 12 bankruptcy parallels a Chapter 13, but a Chapter 12 contains provisions specifically designed to aid farmers and anglers in reorganizing their personal and business finances. Others Chapter9appliesonlytomunicipalities.Chapter15appliestointernational bankruptcycases. What is included in the bankruptcy estate? Whenaperson orentity filesforbankruptcyprotection,thebankruptcycode sweepsthatperson sentireexistinginterestinpropertyintothebankruptcyestate. Thebankruptcyestateincludestangibleproperty,suchasrealestateor automobiles,andintangibleproperty,suchasstocks,causesofactionsoreventhe righttoredemptionofforeclosedproperty.thebankruptcyestateencompasses manypropertyinterests.inwisconsin,thisincludesalmostallcommunityproperty. Whenindoubt,assumethatanyinterestthedebtorhasinpropertyisthe bankruptcyestate sproperty.

6 Itcansometimesbefrustratingwhen,asacreditor,youknowofpropertythe debtorhasandcankeepafterthebankruptcywhilethecreditorreceivesnothing. TheBankruptcyCoderemovesexemptpropertyfromthebankruptcyestate. Therefore,theexemptionsallowdebtorstoremovepropertyfromthetrustee s controlandretainthatpropertypost bankruptcy.theseassetsareexemptfrom beingliquidatedtopaydebts.onlynon exemptpropertyistheestate sproperty, whichthetrusteemayselltopaycreditors.asstatedabove,thisiscommonina Chapter7bankruptcy. What is the automatic stay? Bankruptcy affords debtors a powerful form of relief the automatic stay. The automatic stay stays further actions by creditors to collect pre-petition debt while the bankruptcy case is pending. The automatic stay is designed to maintain the status quo, at least for a limited time, by having the bankruptcy court control resolution of actions and claims against the debtor and the debtor s property. The automatic stay takes effect immediately upon the filing of a bankruptcy petition. The automatic stay applies to all creditors despite whether they receive notice of the filing. The stay encompasses almost any action taken to collect a debt. Some examples of precluded actions include Filingalawsuitagainstadebtor Continuingalawsuitagainstthedebtororprosecutinganappeal Enteringajudgmentagainstadebtor Writtenorverbaldemandsforpaymentsoroffersofsettlement Actionstorecoverafraudulenttransfer The automatic stay can also reach to co-debtors in Chapter 12 and Chapter 13 bankruptcies. This co-debtor stay prohibits creditors from collecting consumer debts from co-debtors while the automatic stay is in effect. Bankruptcycourtsroutinelygrantrelieffromtheautomaticstaytosecured creditorswhodonothave adequateprotection. Acreditornothavingadequate protectionmeansthatthedebtorhasnoequityinthecreditor scollateralorfailsto makeperiodicpaymentstothecreditor.bankruptcycourtswillalsograntrelief fromtheautomaticstayifthedebtorhasnoequityinthecollateral,anditisnot necessarytoeffectivereorganization.creditorswithsecureddebthavehigher prospectsofobtainingrelieffromstay.

7 A debtor injured by a willful violation of the automatic stay is entitled to actual damages, including costs and attorney fees. In appropriate actions, the debtor could also receive punitive damages because of a creditor s willful violation of the stay. The automatic stay also imposes an affirmative duty to stop violations from occurring. For example, a garnishment action might have commenced. Upon the bankruptcy filing, the creditor must take the action necessary to halt the garnishment. Most states, including Wisconsin, recognize a right of setoff in favor of a creditor. However, the automatic stay prohibits the creditor from setting off debts arising before the case was filed. The best approach for creditor institutions in such situations is to freeze the debtor s account swiftly and file a motion for relief from stay to permit the setoff of that account. The refusal by the financial institution to pay the debtor the funds in the debtor s account, if the refusal is only temporary while the lender seeks relief from stay, will not constitute a setoff subject to sanctions. Note that the refusal to pay must not be permanent or absolute. A creditor must make a motion for relief from stay to receive such relief. A court will grant relief from stay: Forcause,includinglackofadequateprotectionofthecreditor sinterestin thecollateral Ifdebtorhasnoequityinthecollateral,anditisnotnecessaryforeffective reorganization The automatic stay terminates for a creditor 30 days after the request for relief from stay is made, unless the court rules otherwise after notice and a hearing. Why should I have the debtor reaffirm the debt? Manydebtorshavedebtssecuredbycollateral,suchasvehiclesorhomes.The debtorsmightwishtoretainthepropertysecuringthedebts.consumerdebtors haveseveraloptionsbywhichtheymayretaintheseassets,butthemostcommon methodisthroughreaffirmation.inareaffirmation,thedebtormakesanew agreementwiththecreditortopaythedebt. AreaffirmationagreementisanagreementbyaChapter7debtortocontinuepaying adischargeabledebt(suchasacarloan)afterthebankruptcy,usuallytokeepthe collateral(thecar)thatwouldotherwisebesubjecttorepossession. Reaffirmationagreementscanbetimeconsumingtoexecute,buttheyareworththe effortonthecreditor sside.withoutareaffirmationagreement,acreditorcould continuetotakepaymentsfromthedebtorpost bankruptcyandretainitssecurity interest.however,bynotobtainingareaffirmationagreement,ifthedebtorfailsto makepaymentspost bankruptcy,thecreditorhasnorighttoseekdeficiencyrights

8 againstthedebtor itmayonlyseekrepossessionofthecollateral.thus,an executedreaffirmationagreementkeepsthedebtoronthehookpost bankruptcy, whichcanbealargeincentiveforthedebtortokeepcurrentwithallpaymentsand tocontinuetoworkwiththecreditor. Thebankruptcycourtmustapproveareaffirmationagreement.Occasionally,when thedebtor sincomeisstilllessthanitsdebts(afterincludingthereaffirmeddebt),a courtmaydisapprovethereaffirmationrequest.whenpresentingareaffirmation agreement,thecreditoranddebtormustprovethatreaffirmationofthedebtwill notcauseunduehardshiptothedebtorafterbankruptcy.thus,acourtmay disapproveareaffirmationagreementifitseemsthatthedebtorwillnotbeableto affordtheproposedpaymentspost bankruptcy.ifacourtdisapprovesa reaffirmationagreement,thecreditorordebtormayrequestahearingandattempt torebutthepresumptionofunduehardship,orthedebtorandcreditormayagree tocontinuetoacceptpayments,andthecreditorwillnotexerciseitslienrightsin thecollateralifitcontinuestoreceivepaymentsbythedebtor. Ifpersonalpropertyissecuredbyapurchase moneysecurityinterest,achapter7 debtormustredeem,reaffirmorsurrenderthepropertywithin45daysafterthe firstmeetingofthecreditors.ifthedebtorfailstodoso,thepropertyisdeemed abandonedbytheestate,andtheautomaticstayisterminated. Althoughitisusuallyadvisabletoacceptreaffirmation,acreditorisnotrequiredto doso.eachcaseshouldbeindividuallyevaluatedbythecreditortodeterminewhat isinitsbestinterest. What information is important on the notice of bankruptcy filing? Anytimeadebtorfilesforbankruptcy,heorshemustlistallcreditorsona schedule.thecreditorslistedonthisschedulereceiveanoticeofthebankruptcy filingwhichmightincludethefollowinginformation: Thenameandcontactinformationofthedebtor sbankruptcyattorney Thedatethepetitionforbankruptcywasfiled ThedateoftheSection341Hearing Deadlinestoobjecttodischarge Deadlinestofileaproofofclaim Themostimportantinformationonthisinformationsheetisthedeadlines.Such deadlinesincludethedeadlineforfilingaproofofclaimorobjectingto

9 dischargabilityofadebtorobjectingtotheexemptions.itisimportantforthe bankerreceivingthisnoticetosendittotheattorneyforreviewanddiscussion. OnthebankruptcysheetisalsothedateandtimeoftheSection341Hearing sometimescalledthe meetingofthecreditors hearing.atthishearing,thetrustee questionsthedebtorunderoathaboutinformationintheschedulesandthe debtor sgeneralfinancialdealings.anycreditorwishingtoappearmaydosoand hasalimitedrighttoquestionthedebtor.thishearingcanbeusefulforcreditors whobelievethedebtorhaspotentiallymadefraudulentstatementsorcommitted otheractsthatmightaffectthedischargabilityofthedebt.creditorsmayalso appearandquestionthedebtoratthishearingtogivehintstothetrusteeabout falsitiescontainedinthebankruptcypetitionorotherassetsforthetrusteeto collectandselltopaycreditors.possibleattendanceatthishearingshouldbe discussedwithyourattorney. How does a bankruptcy affect a foreclosure? Bankruptcyfilingsarecommonduringtheforeclosureprocess.Theobviousresult ofabankruptcyfilingistheimpositionoftheautomaticstay.forthecreditorto continueitsforeclosureprocess,itmustwaituntilthedebtorisdischargedorapply andreceiverelieffromstay.theeffectsonaforeclosureactionaredifferent dependingonwhattypeofbankruptcythedebtorfiles. Chapter7andForeclosure If a debtor files a Chapter 7 bankruptcy petition, the filing will only delay the foreclosure process. A Chapter 7 filing will not allow the debtor to force reinstatement of a mortgage. Additionally, while it is possible to sell a house while in a Chapter 7 bankruptcy, doing so is complicated, with added costs that will reduce any net proceeds to the debtor. However, a Chapter 7 will discharge any deficiency the creditor might have had against the debtor because of the foreclosure. The filing will also usually expand the time in which the debtor has to move out of the property by several months. Chapter13andForeclosure IfadebtorfilesaChapter13bankruptcypetition,thedebtorwillbeallowed toreinstatethemortgagebycatchinguponanydelinquentpaymentsover

10 time.thiscanbeveryappealingtodebtorswhohavebeenunsuccessfulin renegotiatingtheirdebtafterthebankhasacceleratedthenote. Forexample,adebtormighthavea30 yearmortgagenotewith27years remaining,butthedebtor,failingtomakepaymentsforthelast6months,is now$3,000inarrears.underchapter13bankruptcyrules,thedebtormay curethatdefaultoverareasonabletimeandreinstatetheoriginalmortgage anditsoriginalmaturity.however,whilecuringthearrearagethroughthe plan,thedebtormustcontinuetomakeallcurrentpaymentsdueunderthe mortgage. Additionally,inaChapter13filing,juniorliensorunsecuredportionsofliens maybestrippedfromthepropertysothepropertycanbemoreeasilysoldor refinanced. Forexample,underaChapter13plan,thedebtormaybifurcatetheclaimsof undersecuredcreditors.thus,suchcreditorhasasecuredclaimtotheextent ofthecollateral svalueandanunsecuredclaimforthebalance.thedebtor maypaythesecuredclaimwhiletreatingtheunsecuredportionoftheclaim withallotherunsecuredcreditors.thepracticaleffectissuchthatthe securedclaimwillbepaidinfullthroughtheplan,therebyreleasingthelien uponthedebtor spropertyservingascollateral,whiletheunsecuredclaim willreceiveaverysmallportionoftheamountdue. This lienstripping isunavailableinachapter7bankruptcy.lienstripping isalsounavailableifthecreditorholdsapurchase moneysecurity agreementinamotorvehicleacquiredforthedebtor spersonalusewithin 910daysprecedingthebankruptcyfiling. Despitethechoiceoffilingbythedebtor,thebankshoulddiscussitsoptionswithan attorneywhenaclientinthemiddleofaforeclosurefilesforbankruptcy. Copyright ~ 2011 Bakke Norman, S.C. R0511

11