Category: Bankruptcy

As a creditor’s lawyer, I know how common it is for borrowers to quickly file bankruptcy in response to collections, but I am well aware that there remains a strong stigma attached to filing bankruptcy. This Inside Tuscon Business article discusses some of the most common “myths” about the impact of a bankruptcy filing.

Again, from a creditor’s perspective, a bankruptcy filing isn’t always the worst development. On one hand, a creditor is limited from collection on the few remaining assets, but, on the other, so are all the other creditors–a Trustee is appointed and the assets are administered by the Trustee, equally. Further, if the claim is secured by collateral, then a creditor has a variety of protections that can prompt surrender or payment.

Again, it’s preferred to be paid in full outside of bankruptcy, but, when dealing with some borrowers, the bright light of full disclosure that comes with a bankruptcy filing is a good thing.

The Commercial Appeal in Memphis has a story about David Kennedy, the Chief Judge of the Bankruptcy Court in the Western District of Tennessee (Memphis), who recently celebrated his 30th year on the bench.

Judge Kennedy’s court was the first Bankruptcy courtroom I ever walked into.  It wasn’t as a debtor or as a lawyer; my sister worked in the Court’s IT department, and the Judge, hearing I was a first year law student, invited me to observe during my spring break.

Having never been to court, having never talked to a Judge, and not really knowing what “bankruptcy” was, I was in way over my head. 

But, between each of the docket calls, the bailiff came and took me back to the Judge’s chambers, where the Judge would review the issues raised in each matter with me and talk about the practice of bankruptcy law in general.

I listened intently, but–as you’d expect from a first year dreaming of a career as a prosecutor–I was drowning in deep waters. Even though none of it made any sense to me, I remember Judge Kennedy getting really fired up explaining one issue to me, and he pulled the Bankruptcy Code out to specifically read me 11 U.S.C. Sec. 1334, which states the jurisdiction of the Bankruptcy Courts.

Now, 13 years later (with eleven years of unexpected bankruptcy practice behind me), I never come across 11 U.S.C. Sec. 1334 without thinking about Judge Kennedy and the time he took to show me around and share his passion for Bankruptcy Law with me.  He was so generous with his time with me and, who knows, maybe that day in Bankruptcy Court set my path a little bit for the career I ultimately have found.

In the years since, I’ve run into the Judge in a lot of different places–Memphis basketball games, the Midsouth Commercial Law Institute Seminars–but rarely in his courtroom. Here’s hoping I make it back soon.  

The Nashville Post reports today that the U.S. Department of Labor filed a lawsuit against Corinthian Custom Homes, Inc. for failing to pay withheld employee funds into the employees’ 401(k) accounts. More details are available here.

This is a great sign that the government is watching employers’ bankruptcy filings for this very common issue and taking action when those employers dip into funds it had a fiduciary duty to protect. Corinthian Custom Homes left a lot of people unpaid, and it’s good to see that the Dept. of Labor is protecting the former employees from this type of theft.

Just because someone who owes you money files Bankruptcy, it doesn’t mean the that you’ll never receive any money and you should throw away your judgment.

Even in bankruptcy, there’s still a chance of monetary recovery. In addition to the benefits to the debtor (i.e. the discharge of debts), the secondary point of the bankruptcy process is to maximize return for creditors by organizing and selling the debtor’s non-exempt assets. But, to be candid, most creditors in bankruptcy only receive pennies on the dollar in the process.

Keep in mind, however, the success rate in Chapter 13 bankruptcy cases (where debtors repay a percentage of their debts over 3 to 5 years) can be as low as 20%, meaning that most of those cases end with a dismissal. A dismissal is good for a creditor, because there is no discharge of the debt. Instead, the full amount remains due and owing. Debts are eliminated only when debtors receive a “discharge.” That’s an important distinction to know.

Finally, remember that a bankruptcy discharge only discharges “debts”—not “lien” rights. So, if you’ve already obtained a judgment and recorded it as a lien, then your lien on the debtor’s property may survive the bankruptcy discharge. As a result, even though you can’t collect your debt, you can enforce your lien in the event of an attempted sale or refinance.

Of course, a bankruptcy filing invokes the automatic stay, which requires a cessation of all collective efforts. But, even though your collection may be stayed, that doesn’t mean that it’s the end of the line on your efforts.