Bankruptcy Basics, Part I


Henry Chuang

by Henry Chuang on January 16, 2012

in Banking Issues, Bankruptcy

In the past several months, I have had numerous private lender clients come to our office and ask me how they should proceed after receiving a notice of bankruptcy from a borrower.  In this article, I will summarize some of the basic bankruptcy terms from the perspective of creditors and give you a quick reference for the important terms.  With a grasp of these terms, you can have a better understanding of the bankruptcy process and save yourself time and money when you talk to your lawyer about how to maximize your chances of recovery.

Debtor: The Debtor is the person, couple, or entity who filed for bankruptcy protection.

Debtor’s Estate: When a Debtor files for bankruptcy, all of the Debtor’s assets are automatically transferred to the Estate.  The Estate holds the assets for the creditors until the assets are distributed or given back to the Debtor if deemed to be valueless.

Automatic Stay: The most important term that any creditor should learn about is the automatic stay.  Now, most people know that if someone files for bankruptcy, the debtor is protected from collection.  However, very few people know how this process works.  Under bankruptcy law, on the filing of the bankruptcy petition with the court, an automatic stay kicks into effect preventing all creditor action against a debtor, even if the creditor knows nothing about the bankruptcy.  If the creditor takes an action in violation of the stay, that action is void, which essentially means that in the eyes of the law, it never happened.  If a creditor knowingly takes action in violation of the stay, that creditor can be subject to triple damages.

While a vast majority of people filing for bankruptcy will receive the protection of the automatic stay, there are a few exceptions to this rule.  The major exception to this rule is if the debtor has already filed for bankruptcy one or more times within the past year.  In those instances, the stay is in effect for 30 days if there has been one filing or not all if there have been multiple filings.

Trustee: In Chapter 7 and Chapter 13 bankruptcies, an individual known as a Trustee is appointed to manage the bankruptcy case.  In Chapter 7 bankruptcy, the role of the Trustee is to determine whether the debtor, the person filing for bankruptcy protection, has any assets of value.  If there are any assets, the Trustee will collect them to distribute to the creditors.  This usually takes the form of a sale of major assets such as a house or a car.  In a Chapter 11, if there is evidence of debtor fraud, then a Trustee may be appointed upon a motion and noticed hearing.

In Chapter 13 bankruptcy, the role of the Trustee is to determine whether the debtor’s plan to reorganize the estate and to pay creditors is feasible.  If the debtor can make a plan to pay creditors that complies with the law, the Trustee will begin collecting money from the debtor and distributing those payments to the creditors.

341 Meeting of Creditors: A 341 Meeting of Creditors refers to the bankruptcy code section, 11 U.S.C. §341.  In that section, the bankruptcy code requires the Trustee to hold a meeting and ask the debtor questions about the debtor’s assets and financial condition.  As the name implies, creditors can attend the meeting to ask questions also.  However, very few creditors appear as the Trustees tend to do a good job in finding debtor’s assets and questions that can be asked of the debtor are limited to financial issues.

Liquidation or Reorganization: Bankruptcies come in two varieties, either a liquidation or a reorganization.  Under a Chapter 7 Bankruptcy, a debtor is attempting to liquidate all assets and does not attempt to reorganize to repay the debts.  In a Chapter 11, 12, or 13 Bankruptcy, the debtor is attempting to reorganize and repay creditors.

In my next article, I will elaborate on additional terms that deal with creditors’ rights and dealing with a debtor’s reorganization plan.

If you have any further questions don’t hesitate to give us a call at 650.327.2900, or visit our website at www.BrewerFirm.com. If you like our articles, you can show your support by “liking” us on Facebook where you can view Brewer Firm updates and enter into our Brewer Firm Giveaways.

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avatar Tony Scott January 20, 2012 at 10:20 am

This is a very informative and helpful post. Thanks to this, I will have a great idea on issues like this.

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