Exceptions to the Automatic Stay Exist to Allow Enforcement of Some Materialmen’s Liens

When a borrower files bankruptcy, a good rule of thumb is that the automatic stay of 11 U.S.C. § 362 applies to stay any and all acts against the borrower or his property related to pre-petition causes of action and debts.

But, 11 U.S.C. § 362(b) provides some exceptions, include the exception found at § 362(b)(3), which provides that the automatic stay does not stay

…any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b) of this title or to the extent that such act is accomplished within the period provided under section 547(e)(2)(A) of this title…
This section is most important to creditors who hold some lien interest in the debtor’s property, but the bankruptcy was filed during the time that the creditor was allowed to perfect them (or maintain them).
A Bankruptcy Court  in North Carolina recently issued an opinion that clearly shows how this exception should apply in Branch Banking & Trust Co. v. Construction Supervision Services, Inc. (In re Construction Supervision Services, Inc).
In that case, a subcontractor held valid but unperfected materialman’s lien rights on a property, which remained valid and enforceable, but for the bankruptcy filing. Because of the 362(b)(3) exception (i.e. the rights were valid and timely, except for the fact that a bankruptcy was filed), the contractor was able to assert those rights post-petition.
Again, the general rule is that a bankruptcy operates to stay all activity, but there are exceptions.

Multiple Bankruptcy Filings: Debtors are Ineligible for New Discharges for 8 Years Between Chapter 7 Bankruptcy Cases

How quickly can an individual who has received a Chapter 7 discharge obtain a new Chapter 7 discharge?

The answer is in 11 U.S.C.A. § 727(a)(8), which provides that the Bankruptcy Court shall grant a discharge, unless:

(8) the debtor has been granted a discharge under this section, under section 1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition;

So, the quick answer is that you count out 8 years from the date that the individual filed the first case in which he or she received a Discharge. Note: You don’t count the 8 years from the last discharge, but, instead, from the date that the earlier case was filed.

This is why you see what some people refer to as “Chapter 20” bankruptcy cases, in which a debtor receives a discharge in Chapter 7 and then immediately (or soon thereafter) files a subsequent Chapter 13 case. The debtor doesn’t get a discharge in the Chapter 13, but can get the other benefits of Chapter 13, like stretching out the amortization of a debt that was reaffirmed in Chapter 7 or obtaining a stay from collection on liens or reaffirmed debts.

This is a change from earlier law, which set the time period between discharges using a 6 year period.

 

Another side issue to consider: under 11 U.S.C.A. § 1328(f)(1), the debtor in a subsequent Chapter 13 will not receive a discharge in that Chapter 13 if he or she received a discharge under 7 or 11 in a case filed under 7 or 11 during the 4 year period preceding the Chapter 13 filing.

If a Debt Isn’t Scheduled in a Chapter 7, Is it Discharged? (Probably)

Growing up, my dad liked the saying, “If a tree falls in the woods and nobody is there to hear it, does it make noise?” (Actually, he used the alternate version, involving a bear, bear excrement, and the resulting odors).

But, let’s get back to creditor rights talk: “If a Debt isn’t Scheduled in a Chapter 7, Is it Discharged?

I get this question all the time, from a creditor who–for whatever reason–isn’t listed as a creditor in the Bankruptcy Schedules and who may not get notice of the Bankruptcy Case.

The general thought is, if you want to discharge the debt, you have to list and send notice that creditor. This comes from 11 U.S.C. § 523 (a)(3), which says that all debts are discharged under § 727, unless those debts that are:

“…neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit–

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request…”

Based on the text above, it’s pretty clear, right?

Well, the Sixth Circuit Court of Appeals has very convincingly ruled otherwise, in In re Madaj, 149 F.3d 467 (6th Cir. 1998). In that case, the debtor intentionally hid the bankruptcy from the creditors (who, coincidentally, were his foster parents). They weren’t listed, weren’t warned, and, in fact, the debtors actively kept the case a secret from mom and dad.

But, nevertheless, the Bankruptcy Court noted that the case was a no-asset case, meaning no Proof of Claim deadline was ever set, such that the § 523 (a)(3) timelines and deadlines were never implicated. The Court said that, because no claim deadline was ever set in this no asset case, then it didn’t matter when the creditors learned of the Bankruptcy Case: the instant they learned about the Bankruptcy, the debt was discharged.

“Their learning of the bankruptcy after the entry of the discharge order did not transmogrify the debt into one that is excepted from discharge under some provision of the Code other than § 523(a)(3)(A).”

Once upon a time, when a creditor wasn’t listed, the debtor would file a Motion to reopen the closed bankruptcy case and then amend their Schedule F to include the debt. The Court expressly rejected that practice. Instead of imposing administrative hassle on the Clerks and counsel, the Court found that such debts–listed or unlisted–are discharged. In a no asset case, “the fact that the debts were not listed becomes irrelevant.”

So, in these situations, that sound you hear is the debt getting discharged.

Presenting for NACM on Buying and Selling Claims in Bankruptcy

If you’ve ever been a creditor in a large Bankruptcy Case, you’ve probably received some calls or letters, offering to buy your Bankruptcy Proof of Claim from you. Sounds like a great deal, right? Somebody is going to pay you money for a bad debt. What can go wrong?

On Friday, July 17, 2015, I am presenting an education session on “The Value of Selling Claims in Bankruptcy” for National Association of Credit Management. This is part of their National Communications Credit Group Annual Meeting, taking place in Nashville this year.

In my presentation, I’ll be talking about the issues surrounding claim buying and selling, and also all the reasons why somebody would want to pay you for a bankruptcy claim.

But, if you’re not attending, don’t worry. After the seminar, I’ll be posting some of the highlights from my materials.

Bankruptcy Discharge: You Only Get One Every Eight Years

Sometimes people need to hit the “reset” button more than once, even in Bankruptcy Court.

How quickly can an individual who has received a Chapter 7 discharge obtain a new Chapter 7 discharge?

The answer is in 11 U.S.C.A. § 727(a)(8), which provides that the Bankruptcy Court shall grant a discharge, unless:

(8) the debtor has been granted a discharge under this section, under section 1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition;

So, the quick answer is that you count out 8 years from the date that the individual filed the first case in which he or she received a Discharge. Note: You don’t count the 8 years from the last discharge, but, instead, from the date that the earlier case was filed.

This is why you see what some people refer to as “Chapter 20” bankruptcy cases, in which a debtor receives a discharge in Chapter 7 and then immediately (or soon thereafter) files a subsequent Chapter 13 case. The debtor doesn’t get a discharge in the Chapter 13, but can get the other benefits of Chapter 13, like stretching out the amortization of a debt that was reaffirmed in Chapter 7 or obtaining a stay from collection on liens or reaffirmed debts.

This is a change from earlier law, which set the time period between discharges using a 6 year period.

Another side issue to consider: under 11 U.S.C.A. § 1328(f)(1), the debtor in a subsequent Chapter 13 will not receive a discharge in that Chapter 13 if he or she received a discharge under 7 or 11 in a case filed under 7 or 11 during the 4 year period preceding the Chapter 13 filing.

Post-It Note: Creditor’s Rights During Bankruptcy

As many of you know, I’ll occasionally use this blog as a place to post reminders or cites to cases for my own benefit. As you’ve seen in the past, I call those entries “Post-It Notes.”

I saw this CLE seminar and thought the content would be helpful (plus, it’s a good outline for any future Creditor’s Rights CLEs I might teach). It’s presented by NBI Seminars and is called “Creditor’s Rights in Bankruptcy.” It’s set for July 31, 2013.

Here’s the Agenda:

 

  • Case Evaluation
    • 10 Questions to Ask Before Getting Started
    • Important Timeline Considerations
    • Determining the Priority of Claims
  • Miscellaneous Creditors’ Rights
    • The Involuntary Bankruptcy as a Collection Remedy
    • Examination of Debtor’s Affairs
    • Rule 2004 Exams
    • Creditors’ Committees in Chapter 11 Cases
    • Dismissal or Conversion of a Bankruptcy Case
    • Appointment of and Communication With a Trustee or Examiner
    • Recovery of Property for the Benefit of Creditors
    • Municipal Collection Issues
  • Ethical Representation During Bankruptcy

    • Collection Letters and Communication With the Debtor
    • Misrepresentation
    • Intermingling Activities of Collection Agency and Attorney
    • Harassment
    • Attorneys’ Fees
    • Avoiding Violations of the Injunction
  • Overview of Creditors’ Rights Under Each Chapter
    • Chapter 7
    • Chapter 13
    • Chapter 12
    • Chapter 11
    • When the Debtor Converts From a Chapter 13 to a Chapter 7 Case
    • Significance of Valuation of Collateral
  • Claims and Distributions
    • Filing and Allowance of Claims
    • Objections to Discharge
    • Objections to Confirmation
    • Dealing With Objections to Claim
    • Distribution to Creditors
    • UCC Filing
    • What to do When the Debtor Defaults on the Repayment Plan
    • Recovery of Fraudulent Transfers
    • Reaffirmation Agreements
  • Automatic Stay
    • Broad Scope of the Automatic Stay
    • Obtaining Relief From the Automatic Stay
    • Motion for Lift of Stay: How, Why You Can Request It
    • Changes in the Automatic Stay in Consumer Cases Involving Repeat Filers
    • Changes in the Automatic Stay in Certain Other Limited Situations Involving Liens on Real Estate
    • Changes in the Automatic Stay Involving Consumer Landlord/Tenant Law
    • Exceptions to the Automatic Stay and Related Changes
    • Monetary Sanctions for Automatic Stay Violation Where Notice is Lacking
  • Representing Creditors in Adversary Proceedings
     
  • Special Rights in Particular Property
    • Reclamation Rights
    • Setoffs
    • Landlords and Equipment Lessors

 

Adequate Protection Considerations in the Middle District of Tennessee Bankruptcy Courts

Despite using the same Bankruptcy Code, Bankruptcy Courts often have a broad range of practices on how the exact same statutes can apply.

While most creditors’ lawyers will call any Bankruptcy Court “debtor-friendly,” one way that the Bankruptcy Courts in the Middle District of Tennessee are markedly different than others is the threshold of proof required for creditors to receive “adequate protection” payments from the debtor.

Adequate Protection refers to payments made by the debtor to the creditor, generally, to compensate the creditor for the use of the creditor’s collateral. The statutory precedent is 11 U.S.C. § 361(1), which allows the debtor to make a “cash payment” to the extent that the automatic stay “results in in a decrease in the value of [the creditor’s] interest in the property.” In layman’s terms, if the bankruptcy stay hurts or impairs the value of your collateral, you may be entitled to a cash payment (or an alternate/replacement lien).

In some districts, like the Middle District of Georgia, the Bankruptcy Courts allow the resumption of contract payments to a secured creditor, without a deep analysis of depreciation.

The Middle District of Tennessee takes a different approach. Here, a secured creditor is only entitled to adequate protection in the amount that it can prove depreciation of its lien. So, with a car, the creditor would get compensation for the loss of value from the Debtor’s use of the collateral. (It’s substantially more difficult with real property, where depreciation is may be impossible to prove.)

In order to obtain Court approval and avoid an objection from the U.S. Trustee, the creditor will typically need to hire an appraiser to go look at the vehicle and assess the value and his estimate of how much wear and tear/depreciation is imposed on the car on a monthly basis. Then, the Court would order monthly adequate protection payments in that amount.

As an aside, this practice isn’t for the debtor’s benefit; it’s actually designed to protect unsecured creditors from arbitrary loss of cash/income from the Bankruptcy Estate.

As a creditors attorney operating in the Nashville Bankruptcy Courts, this a conversation I have a lot with outside counsel. It’s a hard lesson to teach, especially when the Courts in their backyard take the opposite approach.