Defending Your Creditor Client’s Claim Against a Debtor in Bankruptcy - ABA YLD 101 Practice Series

By Kito B. Robinson

The world of bankruptcy law is fast-paced and often complex. The following checklist will help you cover the bases in preparing to assist your client when a debtor of your client files a bankruptcy petition.

Debtor’s property and the automatic stay.
Upon the commencement of a bankruptcy case, a bankruptcy estate is created. In cases filed under Chapters 7 and 11 of the Bankruptcy Code, the estate consists of all property belonging to the debtor on the date the bankruptcy petition is filed. For cases filed under Chapters 12 and 13, the estate also consists of property acquired by the debtor during the bankruptcy case.

Bankruptcy also imposes an automatic stay. Pursuant to 11U.S.C. § 362(a) the automatic stay suspends all actions against the debtor and the debtor’s assets during the pendency of the bankruptcy case. In addition, in Chapter 12 and 13 cases, the stay serves to protect certain co-debtors of the debtor, such as the spouse. If your client has pending litigation against the debtor, consider whether to file with the bankruptcy court a motion to lift the automatic stay on the grounds listed in § 362.

Notice of the bankruptcy filing. When filing a bankruptcy petition, the debtor must provide a list of known creditors to the clerk of the bankruptcy court. The bankruptcy clerk then mails notice of the bankruptcy filing to these creditors. For entities with multiple offices, ensuring that bankruptcy notices make it to the right person in a timely fashion can be problematic. However, a solution to this problem presents itself under new bankruptcy law. Under § 342(f ), the creditor can file a “notice of address” with any bankruptcy court that must be used by all bankruptcy courts or by a specific bankruptcy court, as specified by the creditor. Moreover, notice of the bankruptcy filing generally will not be effective as to a creditor that does not receive notice in accordance with § 342. Nonetheless, a prudent creditor’s attorney should check for bankruptcy filings before engaging in collection activity.

Request for notice and entry of appearance.
Inmost cases, a creditor’s attorney who wishes to receive copies of pleadings filed in a case must file an entry of appearance and a request for notice with the bankruptcy court.

Important deadlines.
There are several important deadlines that a creditor’s attorney must be aware of to protect her client’s rights and interest.

§ 341Creditors’Meeting. Except in limited circumstances involving pre-package Chapter 11 cases, the U.S. Trustee must convene a meeting of creditors under § 341. The principal purpose of the meeting is to examine the debtor under oath. Creditors, of course, are entitled to attend the meeting and normally are permitted to ask the debtor a limited set of questions about the debtor’s finances.

Deadline for filing proofs of claim.
A creditor whose claim is listed on the debtor’s schedules in the correct amount and is not marked as contingent, disputed, or unliquidated need not file a proof of claim. Nonetheless, it is advisable to do so given that the debtor can amend its bankruptcy schedules at any time during the case. If a creditor’s claim is not listed in the right amount on the debtor’s schedules or is marked as contingent, disputed, or unliquidated, that creditor generally must file a timely proof of claim to receive any distribution from the bankruptcy estate. Typically, the deadline for filing a proof of claim, known as the “bar date,” will be set forth in the notice of bankruptcy filing or an order entered by the court. Some bankruptcy courts have local rules that may establish the bar date.

Deadline to object to exemptions.
Debtors are permitted to claim certain assets as exempt from the bankruptcy estate and, thus, from distribution to creditors. The trustee and creditors, however, are permitted a brief period of time to object to the debtor’s claimed exemptions. Specifically, pursuant to Federal Rule Bankruptcy Procedure 4003(b), an objection to exemptions must be filed within 30 days after the conclusion of the § 341meeting of creditors.

Deadline to object to discharge or dischargeability.
A discharge is the debtor’s release from the obligation to pay the unpaid balance of all debts that are not excluded from discharge under the Bankruptcy Code. In Chapters 7 and 11, creditors may object to the discharge of individual debtors based on the grounds set forth in § 523 (the debtor is denied a discharge for a specific debt) or § 727 (the debtor is denied discharge for all debts). In Chapter 7 cases, the objection to discharge must be filed within 60 days after the first date set for the § 341meeting of creditors. In a Chapter 11 reorganization case, the objection to discharge must be filed no later than the first date set for the confirmation hearing on the debtor’s proposed plan of reorganization. In Chapter 13 cases, the grounds for objecting to a debtor's discharge, set forth in § 1328(a), are very limited in scope. Upon request of a party in interest, the court presiding over the Chapter 13 case will fix the date for objecting to a debtor's discharge. Non-individual debtors generally are not subject to dischargeability actions. That said, non-individual Chapter 7 debtors and non-individual Chapter 11 debtors that are liquidating do not receive discharges. However, under § 1141, the effect of confirming a Chapter 11 plan will discharge the debtor from any debt.

Review the debtor’s plan, schedules, and statement of financial affairs.
At or near the beginning of a bankruptcy case, the debtor is required to file bankruptcy schedules and a statement of financial affairs, which contain information about the debtor’s finances and pre-petition activities. A creditor should review these documents carefully for accuracy. For example, if the debtor lists a claim as disputed or for an incorrect amount, the creditor must file a proof of claim. Additionally, the creditor should review these documents with an eye for possible objections to a proposed Chapter 11 or 13 plan.

Preferential and fraudulent transfers.
It is possible that the transfers of property or payments received by a creditor within certain periods of time before the bankruptcy filing may be subject to recovery by a bankruptcy trustee or debtor-in-possession.

Section 547 permits the avoidance of preferential transfers made to or for the benefit of a creditor within the 90 days before the petition. This period is extended to one year when the transfer was to an insider of the debtor. The Bankruptcy Code, however, recognizes certain defenses to preferential transfers. These defenses are set forth in § 547(c) and include, among others, the ordinary course of business defense, contemporaneous exchange defense, the new value defense, and when the aggregate value of the transfer is less than $5,000 and the debts are not primarily consumer debts defense. Bankruptcy trustees usually demand creditors return preferential transfers and sometimes sue a creditor in bankruptcy court to recover what was preferentially transferred.

Fraudulent transfers may be avoided by a trustee or debtor-in-possession through § 548 or state fraudulent transfer laws. This means the creditor must return the amount it received and in some instances the creditor can be sued in bankruptcy court to obtain the amount of the transfer.

It is also important to note that post-petition transfers, such as payments for goods purchased by the debtor in the operation of its business, must be authorized by the court. If authorization for the post-petition transfer is not obtained from the court, then § 549 permits the trustee or debtor in possession to avoid and recover the transfer for the benefit of the bankruptcy estate.

Effect of confirmation and discharge.
In general, a confirmed plan is akin to a contract that redefines the rights of all parties in interest. That is, the pre-petition rights of all parties are replaced by the obligations created by the plan. Moreover, the confirmed plan will be binding on all parties in interest, including, creditors that objected to the plan or that did not file a proof of claim.

In a Chapter 11 case, the discharge occurs when the plan is confirmed. In a Chapter 13 case, the discharge occurs after the completion of payments under the plan. In a Chapter 7 case, a discharge occurs during the course of the case and after the period for filing objections to discharge have expired.

Code, rules and particular jurisdiction.
Bankruptcy law is in an intricate matrix of statutory provisions, non-bankruptcy law, bankruptcy rules, local rules, and case law. It is important to consult these sources in order to protect the creditor’s rights and interests.


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About the Author

Ms. Robinson practices with Lathrop & Gage L.C. in Kansas City, Missouri. Her practice focuses on commercial bankruptcy, creditors' and debtors' rights, and commercial litigation. Ms. Robinson is also a member of the American Bar Association Young Lawyers Division, the Kansas City Bankruptcy Bar Association, the Kansas City Metropolitan Bar Association, and the Jackson County Bar Association. She can be reached at (816)460-5309 or krobinson@lathropgage.com.

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