You’ve just received notice from the U.S. Bankruptcy Court that one of your consumers has filed for bankruptcy. How should you respond? My Customer Filed for Bankruptcy – Now What?
Understanding Your Rights When a
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Did you know there are in fact six different types of bankruptcy under the U.S. Bankruptcy Code? These are:
Three of the six bankruptcy types are by far the most common, and we’ll focus on these: Chapter 7, Chapter 11 and Chapter 13. Chapter 7 Liquidation
In a Chapter 7 bankruptcy, the consumer’s financial obligations are essentially wiped clean (with a few exceptions). Chapter 7 relief is available to both individuals and businesses.
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Do You Need to Verify a Bankruptcy?Have you heard “through the grapevine” that one of your consumers has filed for bankruptcy? If you haven’t received a notice from the bankruptcy court, what should you do? |
The Notice of Bankruptcy issued by the U.S. Bankruptcy Court includes information about a “341 Meeting." (This is also known as a "Meeting of Creditors.") For Chapter 7 bankruptcies, this meeting with a bankruptcy trustee is used to determine if the consumer owns any assets. If so, these assets can be liquidated and the proceeds will be distributed to creditors.
After the 341 Meeting, the court will send all creditors a notice, indicating whether the Chapter 7 was determined to be an “Asset” or “No Asset” bankruptcy. If the case is deemed "No Asset," and you are an unsecured creditor, you will not receive any payment.
However, in "Asset" Chapter 7 bankruptcy cases, unsecured creditors may be included in the distribution of assets. To be eligible for payment, you must file a Proof of Claim prior to the deadline stated on the Notice of Assets issued by the bankruptcy court.
After the 341 Meeting, the court will send all creditors a notice, indicating whether the Chapter 7 was determined to be an “Asset” or “No Asset” bankruptcy. If the case is deemed "No Asset," and you are an unsecured creditor, you will not receive any payment.
However, in "Asset" Chapter 7 bankruptcy cases, unsecured creditors may be included in the distribution of assets. To be eligible for payment, you must file a Proof of Claim prior to the deadline stated on the Notice of Assets issued by the bankruptcy court.
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Chapter 11 Reorganization
Chapter 11 reorganization allows businesses to keep operating while restructuring their finances in order to pay the bills. Because Chapter 11 is very complex, it’s typically used only by corporate entities.
Like the Chapter 7, there is a 341 Meeting for Chapter 11 bankruptcies, as well. But the purpose for the meeting is different. |
In the Chapter 11 meeting, the U.S. Trustee gathers information about the debtor company’s business plan and ascertains its feasibility. The trustee also uses this meeting to explain the debtor’s obligations, and inspect the debtor’s books (if necessary).
The debtor-business has four months from the date of filing to prepare a reorganization plan. After that, the creditors can propose a reorganization plan through a “creditors’ committee.” The primary purpose of this committee is to ensure that unsecured creditors are adequately represented in the Chapter 11 proceedings.
The debtor-business has four months from the date of filing to prepare a reorganization plan. After that, the creditors can propose a reorganization plan through a “creditors’ committee.” The primary purpose of this committee is to ensure that unsecured creditors are adequately represented in the Chapter 11 proceedings.
Should You Attend the 341 Meeting of Creditors?
A 341 Meetings of Creditors is held for every type of bankruptcy. Despite the name, most creditors do not usually attend these meetings. However, there are certain situations when you may want to attend:
- If the debt is secured, you may need to confirm the consumer’s intentions. For example, in a Chapter 7 the consumer has three options: surrender the secured property, keep the property and reaffirm (i.e., keep paying on) the debt, or redeem the property for its replacement value.
- If you have reason to believe there are discrepancies between the information stated in the bankruptcy petition and the information your consumer provided when applying for credit.
The debtor’s Chapter 11 reorganization plan must be approved by the creditor’s committee before it can be confirmed by the bankruptcy court. There is no specific time limit on completing a Chapter 11 repayment plan. However, most take between six months and two years to complete.
Proof of Claim in a Chapter 11
Creditors in a Chapter 11 case do not need to file a Proof of Claim, as long as they agree with the amount of the debt listed in the bankruptcy petition. On the other hand, if you believe the money owed to you is more than indicated (or if the claim is listed as “disputed, contingent or unliquidated”), then go ahead and file a Proof of Claim for the full amount owed.
–Article Continues Below–
Chapter 13 Reorganization
Unlike Chapter 11, Chapter 13 reorganization applies to individuals (including sole proprietors of businesses).
As with the other forms of bankruptcy all creditors listed in a Chapter 13 will receive a "Notice of Bankruptcy Case Filing" and 341 Meeting. The purpose of the Chapter 13 341 Meeting is to determine if the repayment plan proposed by the consumer should be approved.
As with the other forms of bankruptcy all creditors listed in a Chapter 13 will receive a "Notice of Bankruptcy Case Filing" and 341 Meeting. The purpose of the Chapter 13 341 Meeting is to determine if the repayment plan proposed by the consumer should be approved.
The Chapter 13 repayment plan lasts three-to-five years, and must include the proposed amount to be paid to unsecured creditors. This figure is calculated according to the consumer’s disposable income with one caveat: it cannot be less than what the creditor would have received if the debtor had filed a Chapter 7.
What If the Debt Is Secured?
In a Chapter 13 secured debts may be treated in one of three ways:
What If the Debt Is Secured?
In a Chapter 13 secured debts may be treated in one of three ways:
- The secured property can be surrendered back to the creditor.
- If the debtor is not behind on payments, he may keep the secured property and continue to make payments just as before, “outside” of the Chapter 13 plan.
- If the debtor is behind on his payments, he may keep the secured property and make payments to the creditor through the Chapter 13 plan.
In order to be paid in a Chapter 13, you must file a Proof of Claim. Once the bankruptcy court confirms the Chapter 13 plan, claims are paid out based on their priority.
Typically, secured debts are paid first, followed by priority debts (such as domestic support obligations and taxes).
General unsecured debts are paid last, in accordance with the proposed amount approved by the bankruptcy court.
Typically, secured debts are paid first, followed by priority debts (such as domestic support obligations and taxes).
General unsecured debts are paid last, in accordance with the proposed amount approved by the bankruptcy court.
Let Us Know
If you've received a Notice of Bankruptcy regarding one of your customers, and you're a CSC client, please notify us ASAP. Although we usually receive the notice as well, we are not always included in the debtor's mailing matrix. Contact us, and we'll be glad to answer any questions you may have.
* However, in some states, creditors and collection agencies may still attempt to collect on debts that were jointly incurred. For instance, if an individual petition is filed, but the petitioner was married at the time the debt was incurred, the creditor/agency may pursue collection from the non-filing spouse.
Sources:
Featured Image: Adobe, License Granted
Nolo
Investopedia
Sulmeyer Kupetz Law
U.S. Courts
Lawyers.com
Featured Image: Adobe, License Granted
Nolo
Investopedia
Sulmeyer Kupetz Law
U.S. Courts
Lawyers.com
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Credit Service Company, Inc.
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