Bryce D. Cook Bankruptcy Law Blog on Lawyers.com

 1.     How much money is at stake, and how important is the case to the creditor?

First, try to make sure you understand what your client’s main concerns are in the case.  Often the creditor is most concerned about the payment rate being offered as it compares to the contract rate in the promissory note.  Other times the creditor is most concerned about the value of the collateral.  Sometimes the creditor is concerned about the interest rate.  Regardless of the main concern, you have to take into account the amount at stake.  The initial advice that you give to your client must take into account the creditor’s main concern, but you should counsel the client based upon the amount at stake and the importance of the case to the client.   

2.     Question your client about what is known about the debtor.

Generally, if a creditor believes a debtor is lying or dishonest, you will hear about it in your first conversation with the client.  Regardless, you should ask the creditor for a copy of all loan documents, especially the credit application.  You should compare the credit application to the debtor’s schedules.  Often you will find inconsistencies between the schedules and the application.  The debtor may have had other loans with the creditor that may have a bearing on your strategy.  Try to assemble every possible fact about the debtor.  This will assist you in settlement and at trial.

3.     What type of bankruptcy is it?

If it is a Chapter 7 bankruptcy, everything is usually pretty cut and dried unless an adversary proceeding or motion for relief has to be filed.  If your client has an unsecured claim and it is a no asset case, there is nothing a creditor’s attorney can do but monitor the case for an asset notification or discharge.  If there are dischargeability issues, you need to consider whether the client understands the costs involved in pursuing an exception to discharge or denying the debtor a discharge altogether.

If the case is a Chapter 13 bankruptcy, your client is usually concerned about valuation of the collateral and the payment rate proposed by the debtor.  If the claim is a “910 secured-car claim” and the plan lists the debt as such, the claim must be paid in full regardless of the value (see §1325(a)(9)).  Otherwise, the claim will be paid based on the value or the debt, whichever is less.

If the main issue for your creditor-client is the monthly payment amount, the debtor will generally try to pay a secured claim in 60 months.  More often than not, a creditor, by objecting, can persuade the debtor to pay the claim over a shorter period.  However, if the debtor is unwilling to increase the payment rate, it is difficult to legally compel the debtor to pay it more quickly than 60 months.  If your client is serious about pursuing an objection to trial, a motion for relief from stay is advisable so that you can argue lack of adequate protection.  See (§362(d)(1)).

You should also be aware that the U.S. Supreme Court has set a precedent for the interest rate.  It is generally 1.5% above the prime rate of interest in effect when the bankruptcy is filed.  See In re Till, 541 U.S. 465, 124 S Ct. 1951 (2004).   Although the interest rate has been clearly established by the Supreme Court, often you can negotiate a higher rate if an objection is filed. 

4.     Is there a basis for a dismissal?

If you get the file shortly after the bankruptcy has been filed, you should consider whether there are grounds to seek a dismissal pursuant to §1307 based upon bad faith.  However, these cases are quite rare, and judged on a case-by-case basis. Good faith is to be determined by the totality of the circumstances.  In re Barret 964 F2d 588 (6^th Cir. 1992).  Examples of cases that may warrant a motion to dismiss are:­­­­­­­­­­­­­­­ making false statements and concealing assets, Marrama v. Citizens Bank of Massachusetts, 127 S. Ct. 1105, 166 L. Ed. 2d 1956 (U.S. 2007); and failure to file overdue tax returns, Howard v. Lexington Investments, Inc. 284 F3d 320 (1^st Cir. 2002). 

If your creditor-client sent you the file because the creditor is not receiving payments, other common grounds for dismissal under §1307 are unreasonable delay that is prejudicial to creditors (§1307(c)(1)) and failure to abide by the terms of a confirmed plan (§1307(c)(6)).  The former usually applies when the debtor has failed to timely confirm their plan and the latter usually applies when the debtor has failed to make plan payments after confirmation. 

5.     What kind of claim does the creditor have?

Generally, priority claims are paid first; then secured claims and finally unsecured claims.  If your client has an unsecured claim, there is not much to be done beyond filing a proof of claim.  Often unsecured creditors receive 10% or less in a Chapter 13.  In Chapter 7 cases, creditors rarely receive a dime.  Priority creditor claims are rare for the typical creditor-client.

Unless adequate protection is set up in the plan, secured creditors do not get paid until after confirmation.  So if you represent a creditor, it is important to move for adequate-protection payments: too often debtors are unable to get plans confirmed for months or the case is dismissed before confirmation. 

6.     Is your claim entitled to special treatment under the code?

If your claim is secured by a purchase money security interest in a consumer vehicle purchased within 910 days of the bankruptcy filing, the claim has to be paid in full regardless of value (§1325(a)(9)). This is true because §506 does not apply to those claims.  However, if the value of the collateral exceeds the debt, you may want to object to the value nonetheless to make sure your attorney’s fees are fully paid.

Another claim afforded special treatment under the code is a claim secured solely by residential real estate.  Those debts cannot be modified by the debtor (§1322(b)(2)).

7.     Creditor should get the file to the lawyer as soon as possible.

If you are a creditor and you are considering legal action, get the file to your lawyer soon for several reasons.  First, you may want to question the debtor at the meeting of creditors.  The meeting of creditors is often the best opportunity to get something resolved expeditiously.  If an objection is not filed in time, you may be stuck with what the debtor proposed.  You typically have ten days from the creditors’ meeting to object to a plan.  Also, adequate protection payments do not commence until a proof of claim is filed.  Finally, you may not be able to pursue your claim at all if you miss a deadline.

If you represent creditors, the single most important step to take is immediately recording the deadlines for filing an objection, filing an adversary proceeding, and filing a proof of claim in your calendar system.  You should go over your deadlines at least weekly.  The quickest way to lose a client for good is to have to tell the creditor you can’t pursue something because a deadline was missed.

8.     Are there grounds to have the claim determined nondischargeable or to deny a discharge altogether?

The most common example of grounds to except a debt from discharge involves fraud (§523(a)(2)).  Other common examples are: fraud or defalcation while acting in a fiduciary capacity; embezzlement or larceny (§523(a)(4)); domestic support obligations (§523(a)(5)); and claims resulting from willful and malicious injury (§523(a)(6)). 

Common examples of grounds for denying a discharge altogether are: fraudulently transferring property (§727(a)); concealing or destroying records (§727(a)(3)); lying under oath during the case (§727(a)(4)); failing to explain loss of assets (§727(a)(5)); and failing to obey court orders. (§727(a)(6)(A)).

9.     Should you attend the meeting of creditors?

If you believe there is a decent chance that your case will be litigated, you should attend the meeting of creditors.  First, you should look at the elements of what you must prove and decide what questions to ask.  For example, if the debtor has more than three vehicles, you will want to determine the use for each vehicle.  If the issue is adequate protection, you will want to nail down how many miles the vehicle is driven per day. 

If it is a Chapter 7 case involving a reaffirmation, you will certainly want to present the reaffirmation agreement on or before that date.  Otherwise, there may be considerable delay due to the infrequent contact between the debtor and his or her attorney following the meeting.  You will want to question the debtor about the condition of the collateral and whether there is insurance coverage on the collateral. 

10.  Would a 2004 exam be useful?

If you believe your case will be litigated, a 2004 exam is invaluable.  Often the argument for your client will turn on the debtor’s testimony.  Knowing the debtor’s testimony is crucial to advance the best arguments for your client.  A 2004 exam is also useful in negotiating a higher payment rate.  In an effort to avoid the exam, the debtors will on occasion offer better terms for your client. 

Important Timeline Considerations

The most important deadlines for the creditor to calendar are the meeting of creditors, the deadline to object to the debtor’s plan, the deadline to file a proof of claim, and the deadline to file an adversary proceeding. 

        The meeting of creditors date is important for several reasons.  It is an opportunity to question the debtor about any future hearings, the collateral and whether the collateral is insured.  It is an opportunity to present a reaffirmation agreement in a Chapter 7 proceeding.  Also, it is a good time to attempt to resolve an objection to plan, if you have filed one. 

        Perhaps the most important deadline to calendar is the date to object to the debtor’s plan.  If no objection is filed to the debtor’s plan and the plan is confirmed, the confirmation of the plan is resjudicata as to treatment of the creditor’s claim.  If another creditor or the trustee has objected to the debtor’s plan, there still is an opportunity to object if the plan has not been confirmed, although the initial deadline to object has passed. 

        The deadline to file an adversary proceeding will preclude you from filing a complaint to object to discharge or except a debt from discharge if the deadline expires without an extension being granted.  Generally, the courts will grant a request for extension of time if the motion is filed before expiration of the deadline. 

Determining the Priority of Claims

Under the bankruptcy code, certain types of claims are given priority over others.  All claims can generally be divided into three categories:  1) Priority claims under §507, 2) secured claims, and 3) general unsecured claims.  Priority claims are those that must be paid first according to §507.  Secured claims are paid from the sale of collateral, and the remaining balance, if any, will be an unsecured claim. Finally, general unsecured claims are typically last in priority as they are not tied to any sale of collateral and are subject to whatever priority claims may be in place.

              0;  The priorities of bankruptcy claims are listed under §507.  The first level of priority claims involves those domestic support obligations owed by the debtor, as well as the trustee’s administrative expenses.  The second level of priority involves other administrative expenses chargeable to the bankruptcy estate.  The third level is those unsecured claims arising from the ordinary course of the debtor’s business that after the case has commenced, but before a trustee is appointed.   Fourth are unsecured claims up to $11,725 per individual or corporation earned within 180 days of the filing or the cessation of business, whichever is first in time, for wages, salaries, commissions, etc.   Fifth are claims for contributions to an employee benefit plan arising from services rendered within 180 days before the date of filing or the cessation of business.  Sixth, are claims by grain producers or fishermen against a debtor who operates a storage or processing facility of the same.  Seventh, are claims up to $2,600.00, for deposits related to the lease or purchase of property that were not subsequently leased or purchased.   The eighth level of priority is unsecured governmental claims for various taxes. Ninth are claims for any commitment by the debtor to a federal depository institution regulator to maintain the capital of an insured depository institution.  The tenth and final priority claim are claims for death or personal injury resulting from the operation of a motor vehicle while under the influence of drugs or alcohol.

              0;  After all the priority claims are paid, the next set of payments will come from the sale of secured collateral.  In this situation, property owned by the debtor that acts as security for any loan by a creditor will be sold, and the creditor will receive the value received from the sale.  If the sale fails to yield the amount of value that is actually owed the secured creditor, the remaining balance will be converted to an unsecured claim and will be subject to priority of such a claim.

              0;  General unsecured claims are the final category of claims against a bankruptcy estate.  These involve all those debts owed by a debtor that fail to fit into a priority claim definition or those debts that are not secured by any collateral.  These debts will be last in priority and will only be paid once the first two categories of claims are satisfied.  Please review §507 and the accompanying annotations for the complete statutory listing of priority claims under the bankruptcy code.