Category: Bankruptcy

Creditor Essentials: The Difference between a Bankruptcy Discharge and a Bankruptcy Dismissal

Just as all rivers run to the sea, all bankruptcy cases run to a bankruptcy discharge. Unless they don’t…which probably means that the case has been dismissed.

If you are a creditor, there is a big difference between a bankruptcy discharge and a bankruptcy dismissal.

A discharge means there is no (or modified) liability for the borrower’s debts, usually under 11 U.S.C. 727, 1141, or 1328.  Simply put, a “discharge” means that the debtor wins and doesn’t owe the debt any more.

A dismissal generally means that something has gone wrong in the case (such as a payment default under a Chapter 13 Plan or some failure by the Debtor to comply with the Bankruptcy Code) and, as a result, the bankruptcy case is going to prematurely end…without a discharge.  Here, the creditor wins because the debtor doesn’t get a discharge, and the debt remains due and owing.

This may be an obvious distinction, but it wasn’t to me on the first day I practiced bankruptcy law. Considering the absolutely polar-opposite results the two outcomes have for creditors, however, I learned this important lesson quickly.

Creditor Lawyers Beware: House Passes “Protecting Gunowners in Bankruptcy” Bill

As a creditor’s lawyer, I’m not sure I like the recent passage of H.R. 5827, which allows a bankrupt debtor to exempt up to $3,000 in value of his “rifle, shotgun, or pistol” collection. The Bankruptcy Law Network explains the possible reasoning behind the law:

“Americans should retain the right to defend themselves with firearms even though they face financial difficulties.”

And, yes, collection attorneys are the intended target of this law. (Pun intended…it’s Friday, people, and I’m blogging about exemptions.)

All kidding aside, bankruptcy and state law “exemptions” are actually the best defense against judgment collections. These laws allow a judgment debtor to protect a limited amount of assets from garnishment or levy by creditors. Assuming he properly claims this exemption (and most state court debtors never do), a debtor can fully protect his $3,000 rifle collection from a Chapter 7 Trustee or a creditor.

Michael Vick’s Gifts May Result in Fraudulent Transfer Lawsuits

The Wall Street Journal’s Bankruptcy Beat Blog reports that the Bankruptcy Trustee is going after Michael Vick for making allegedly fraudulent transfers to family and friends. Well, the Trustee is technically going after the family and friends to recoup the $2 million in gifts and transfers.

Under Section 548 of the Bankruptcy Code, a trustee can reach back and recover transfers within two years of the case filing, where the debtor had “intent” to delay or defraud creditors or where the debtor didn’t receive “reasonably equivalent value” in exchange for the transfer. This is fairly common: as things start going bad, an insolvent person transfers his valuable property to others in order to keep it out of his creditors’ reach.

But, where a bankrupt just gives money or property to others, particularly friends and family, that puts a big target on those recipients. The goal of the fraudulent transfer statute is to recover those assets, and then distribute them evenly to all creditors–not just the people the debtor likes. (Note to Creditors: Most states have similar laws as well.)

So, whether the goal was to protect his assets or help his family, all Vick did was get them sued in Bankruptcy Court.

2,500 Employees Laid Off in “Successful” Bankruptcy Reorganization

When talking about big corporate bankruptcy reorganizations, things like “running leaner operations” and “payment in full” (with interest!) to creditors are generally really good things. (Extraordinary things, actually, in Bankruptcy Court.)

But, for the 2,500 employees who are part of the “trimmed” operations of Utah’s Flying J gas stations, the remarkable success of the Bankruptcy is of little comfort. Tennessee based Pilot Travel Centers bought out the assets of Flying J…let’s hope they’re on the market for some people to run the stores.

Things to Consider Before a Bankruptcy Preference Lawsuit

It only takes one lawsuit from a Bankruptcy Trustee to prove that, despite all the talk about fairness and equality, an avoidable preference lawsuit is one of the most unfair creations of the Bankruptcy Code. For those lucky few without first-hand experience, here’s the summary: A bankruptcy trustee may be able to sue creditors to recover payments received within the 90 days preceding the bankruptcy case filing. Lenders who have no collateral for their loans are particularly at risk for such actions.

Faced with account payments from customers who may be on the verge of bankruptcy, make sure to document all payments received during that 90-day period­ and how they were applied. These payment records will be critical to an “ordinary course of business” defense if you are sued. For material suppliers, be sure to advance new funds or sell goods after payment (thus triggering the “new value” defense) or upon cash terms (triggering the “contemporaneous exchange” defense).