Regarding Creditors’ Rights, Bankruptcy is a legal proceeding used by borrowers to stop the collection efforts of creditors. Filing a bankruptcy immediately prevents all creditors from exercising any collection efforts. However, immediate action by the Lender may expedite payment and/ or continuation of foreclosure. Chapter 7 and Chapter 13 bankruptcies, as they relate to lenders, are explained in more detail below.
Chapter 7 of Title 11 in the U.S. Bankruptcy Code controls the process of asset liquidation. A bankruptcy trustee is appointed to liquidate nonexempt assets to pay creditors; after the proceeds are exhausted, the remaining debt is discharged. It is often utilized to discharge unsecured debt such as credit cards, hospital bills, etc.
- Reaffirmation Agreement- As it relates to secured creditors, the debtor must decide whether or not to retain or surrender the property made the basis of the loan. If the debtor decides to surrender the property, then the creditor may proceed to recover the collateral securing the loan. If the debtor wants to keep the collateral, then the debtor and creditor will submit a Reaffirmation Agreement to the court/ trustee which will detail the repayment of past due debt and schedule of future payments.
Often referred to as reorganization, Chapter 13 of the U.S. Bankruptcy Code allows the debtor to file a plan to pay back creditors. Secured creditors will most likely be paid back past due amounts in accordance with current arrearage amount and future payments in accordance with terms set forth in loan documentation as set forth in its Proof of Claim (below).
- Notice of Appearance/ Proof of Claim- Upon the filing of a Chapter 13 Bankruptcy, the Lender is encouraged to file a Notice of Appearance (which allows the Creditor to receive all notices related to the bankruptcy) and a Proof of Claim (which assists the Debtor and Trustee in determining how much is owed to the Lender for purposes of drafting and confirming a Chapter 13 Plan)
- Objection to Confirmation- If the Debtor’s plan does not accurately represent what is actually owed to the Creditor, the Creditor is entitled to file an Objection to the Confirmation of the Chapter 13 Plan. This typically results in creating a dialogue with the Debtor’s counsel in order to resolve any issues prior to confirmation of the plan. If not resolved, then a hearing on the matter is required.
- Motion for Relief from Stay- If a debtor fails to maintain payments in accordance with the Chapter 13 Plan, then the Creditor is entitled to file a Motion for Relief from Stay. These motions are governed by United States Bankruptcy Code, Rule 4001. It usually takes about a month to obtain relief from the automatic stay. If successful, the Creditor will obtain an order lifting the stay and allowing the Creditor to proceed with collection efforts outside of the bankruptcy. However, in the majority of cases, an Agreed Order Conditionally Modifying Stay is negotiated which gives the Debtor a final opportunity to maintain payments or risk the lifting of the stay. The following illustrates the process of obtaining relief from a stay:
- After Debtor has defaulted on at least one (1) post-petition payment, Creditor drafts a Motion for Relief from Stay;
- Said Motion is filed in the same District as where the Debtor originally filed for bankruptcy protection;
- If Debtor and Creditor reach an agreement before the hearing date, then Creditor shall draft an Agreed Order setting forth the terms of the agreement;
- If Debtor and Creditor are unable to reach an agreement prior to the hearing, then an adversarial hearing takes place, and Creditor shall obtain an Order in accordance with the Court’s findings.
- Unopposed Motion for Relief from Stay- Unopposed Motions to Lift Stay are governed in principal by the United States Bankruptcy Code, Rule 4001. As the name suggests, the Debtor does not oppose the Motion and Order because Debtor has decided to surrender the property and an adversarial proceeding is not necessary. Therefore, the process may only take two (2) weeks. Here is a brief summary of the process:
- Creditor drafts Unopposed Motion and Order;
- After obtaining Debtor’s approval (signature) of the Unopposed Motion and Order, Creditor files the Motion and Order together;
- After the Order is executed by the Bankruptcy Judge, Creditor may repossess or foreclose its interest in the property made the basis of the lien.