A T T O R N E Y SX A T X L A W
How To React If You Are A Creditor
By Jennifer Gant
POUGHKEEPSIE, NY – "What do I do if my customer files bankruptcy?" Hopefully that's a question business owners don't have to ask very often, but it's important to know the answer.
Paul Banner, a partner in the Poughkeepsie-based law firm of Banner & Banner, says businesspeople need to learn to minimize losses and maybe even collect their debts when a customer files bankruptcy.
In addition to acting as a trustee for debtors filing for bankruptcy, Banner has also worked with businesses, including credit card giant VISA, to represent the interest of the other side – when customers file for bankruptcy.
"We're seeing more and more fraudulent bankruptcy," states Banner. "According to VISA, 10 to 15 percent of all bankruptcy filings have obvious indications of fraud." But, he adds, don't lump everyone who files into one category as a bad person.
"Bankruptcy is intended as a fresh start, but is not a panacea for people with no money. What happens in many cases is that people borrow from Peter to pay Paul and then they peak out at all their limits."
What about those fraudulent cases? For those of you who thought there was no debtors' prison, don't be so sure. A person who files for bankruptcy can go to jail if it's determined that he or she made a false oath or claim. The possible maximum penalty is $5,000 or five years in jail. That sentence is not usually enforced, but the U.S. Bankruptcy court is trying to discourage fraudulent bankruptcies.
What should business owners do when they receive a bankruptcy notice? "Read it," says Banner simply.
Do you know who the person is? If not, contact the attorney, preferably by letter, he advises.
One thing that creditors should be aware of is the automatic stay. From the moment the bankruptcy filing receives the stamp from the court, creditors must stop trying to collect the debt. They cannot enforce any collection or they risk being fined by the court.
Paul L. Banner, Esq.
"You may not get anything out of the bankruptcy, but you do have rights... But, just because you have a judgment doesn't mean you're necessarily in any better shape than any other creditor, unless there's real estate attached."
– PAUL BANNER
"You may not get anything out of the bankruptcy, but you do have rights," says Banner. You can get a copy of the petition and evaluate your rights. But, he adds, just because you have a judgment doesn't mean you're necessarily in any better shape than any other creditor, unless there's real estate attached.
Attend the meeting of the creditors. This usually occurs about 30 days after the notice is issued and provides creditors with an opportunity to ask questions of the debtor, such as, "When did you first consider bankruptcy?" and "When did you first see an attorney?" That helps determine whether the person anticipated filing before doing business with you, according to Banner.
Did the debtor do something to affect the discharge of the debt? Was there misrepresentation in writing, a loan application with misinformation? Did the consumer run up credit cards just prior to filing? Did the debtor make luxury purchases (in excess of $1,000)?
Look at the timing between when charges were made and when the filing of bankruptcy occurred. Did the borrower exceed the limit on his cards? Was the debtor employed? Did his lifestyle change dramatically? All of this may affect whether or not the debt is discharged, says Banner.
Paul L. Banner, Esq.
"There have been several cases where I've sold enough assets ... to pay all the creditors with interest.
And sometimes the debtor gets thousands of dollars because only half the creditors file proof of claims."
PAUL BANNER
Sometimes the debtor will enter a reaffirmation agreement with a creditor of his own accord to re-negotiate a discharged debt. This doesn't always work in the debtor's best interest, but it may be advantageous to the creditor, according to Banner.
Negotiating a new payment arrangement creates a new debt, and if the debtor reneges again, the creditor can take him to state court and pursue it as though there were no discharge of the debt through the first bankruptcy and the debtor cannot file again under Chapter 7 for six years.
The bottom line for creditors, according to Banner "is to be aware of all important dates. With a Chapter 7 you generally have 90 days to do something."
Banner, who made these points in a seminar for the Poughkeepsie Area Chamber of Commerce, offered the group a final warning to help businesses avoid the pitfalls of dealing with bad debt. "Don't just extend credit to your customers because you think your competitors will."
Banner handles many aspects of bankruptcies, including administering "asset cases," with sometimes surprising results. "There have been several cases where I've sold enough assets that there's been enough to pay all the creditors with interest. And sometimes the debtor gets thousands of dollars because only half the creditors file proof of claims," Banner said.
I'm like a bounty hunter in such instances, receiving compensation based upon assets I bring in. As a trustee I wear a neutral hat and protect the integrity of the bankruptcy process.
There are three common types of bankruptcy filings: Chapter 7, 11 and 13. Chapter 7 bankruptcies are liquidation cases and the most common type of filing. They are used by individuals and businesses. A trustee is appointed to administer the estate; all non-exempt property is sold and liquidated. (exempt property includes the cash value of life insurance policies, Workers Compensation, wages, tax refunds, a home – if there's less than $10,000 in equity per person, a car with less than $2,400 in equity, real property, cash up to $2,500, pensions, Keough and 401K plans, IRAs, security deposits for rent and utilities, Social Security, unemployment compensation, public assistance, and veterans' and disability benefits.)
Chapter 13 is for individuals and is concerned with the adjustment of debts. The debtor goes to a counseling service to work out a payment plan, and if that doesn't work, the debtor files Chapter 13. Under recent amendments, a debtor can file Chapter 13 even if he or she owns a home with a mortgage of $750,000 or has unsecured debts of up to $250,000. Why choose Chapter 13 over Chapter 7? "In Chapter 13, you keep everything you own," explains Banner.
Chapter 11 is intended for business organization and can be used by small businesses and big ones. "The process is very expensive," says Banner, "but the purpose is to give breathing space to allow the debtor to continue to conduct business, but under the protection and supervision of the U.S. Bankruptcy Court."