Sometimes the Postman Brings Bad News: The Notice of Chapter 7 Bankruptcy Case

If you’re doing your job as a creditor, some of your defendants will file bankruptcy.  More than likely, the way you’ll find out is when the Clerk mails you a “Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines.”

This is the first mailing in a bankruptcy case, and a copy goes to all of the creditors and parties listed in the debtor’s bankruptcy Schedules.

In addition to putting the creditor on notice of the filing (and the imposition of the automatic stay), this Notice contains important information about the case, including:

  • What chapter the debtor filed (i.e. Chapter 7)
  • The name and address of the debtor’s attorney and the Trustee
  • The bankruptcy case number
  • The address of the Bankruptcy Court Clerk (and where/how to file pleadings)
  • The date, time, and location of the Meeting of Creditors
  • Deadlines to file Proofs of Claim (if any)
  • Deadlines to object to discharge or dischargeability of your debt

All of this information is relevant as you decide what your next step is. Over the next few weeks, I’ll revisit the various events and deadlines mentioned in the Notice in more detail.

For now, I’ll point to the bottom of the Notice, where there’s a line that shows how optimistic the bankruptcy system is about the recovery of assets:

“Please Do Not File A Proof of Claim Unless You Receive a Notice To Do So”

You see, you have to file a Claim in order to share in the distribution of the money that the Trustee recovers. So, basically, that’s the Clerk’s way of nicely saying, “Don’t Hold Your Breath.”

Be Careful When Dealing with Debt Relief Services

If you’ve watched much late night TV, you’ve probably seen the commercials for debt relief services promising the path out of debt through settlement with creditors. These companies ask consumers to pay them their money, then they’ll attempt reach out to the creditors and, they say, settle all debts for a fraction of what is owed.

In these tough times, consumers are looking for any help they can get, but many commentators say that debt relief agencies are a rip-off. Many cite the fact that the services pay themselves first, and, only after they have paid themselves, do they try to settle the debts.

As a creditor’s attorney, I’ve worked with these agencies on a number of occasions. On one hand, it’s efficient to deal with a business-savvy party on the other end of a debt repayment transaction. On the other, I know how the system works, and I know that, for any dollar they are offering to my creditor client, they have already kept as much in their own pocket.

Long story short, be wary when dealing with one of these companies, on either side of the table.

When Collecting on Judgments in Tennessee, Wage Garnishments Might Not be the Best First Step

The goal in judgment collections is to get as much money as possible, as quickly as possible.

The reason behind the “as much as possible” part is easy: clients want full recovery of the amounts owed.

The reasons behind the “as quickly as possible” are numerous. Maybe you’re competing with other creditors for the same pot of money. Maybe your debtor is getting ready to leave town (or spend all his money). Maybe you think a bankruptcy is on the horizon.

As a result, when deciding what collection tool to use first, always consider which tool gets you the most money the fastest. Judgment liens that immediately attach to any and all properties are a great start. Bank levies that seize all the money in a bank account aren’t bad.

When in a hurry, however, wage garnishments aren’t always your best bet. Here’s why: under Tennessee exemptions law, a wage garnishment is only effective against about 25% of a debtor’s wages (Tenn. Code Ann. 26-2-106). Plus, wage garnishments are applied in the order they are filed, meaning you can get stuck behind other creditors. Finally, a wage garnishment might be the last straw that pushes someone into Bankruptcy…meaning you probably get paid nothing.

Don’t get me wrong–knowing your debtor is working and earning regular income is a great sign of collections to come. But, in the grand scheme, getting just 25% of the earnings spread out over 6 months might not be your best first move.

To Solve Foreclosure Issues, Some Courts May Require Attorneys to be the First Line of Defense

This article in the New York Times suggests that courts may no longer allow lawyers to blame paperwork issues and inaccuracies on their clients. Now, some New York state court judges are requiring lawyers representing lenders to vouch for the accuracy of the client’s representations.

This is a judicial reaction to the frequent reports mortgage lenders relying on incorrect, incomplete, and unverified documents to take action against borrowers. This is an attempt to place some responsibility on the creditor’s attorney to vet the accuracy of his or her client’s documents, instead of leaving it all up to the court system.

As you’d expect, the article quotes foreclosure attorneys who dislike this practice, especially in the face of potential fines in the event the documents are erroneous.

The Rules of Professional Conduct already require an attorney to do a due diligence review of any client’s claims, and this practice could restore some level of faith in the foreclosure process. As it stands now, most borrowers believe that the “robo-signing” issues are indicative of the entire industry, not just a few sloppy lenders.

Any system that introduces only a few basic safe-guards into the process should be welcomed by counsel for foreclosure lenders.

Bankruptcies Fall in 2010, but Expect Record Numbers in 2011

Welcome back after a long holiday break. Of course, it’s always great to have your blog go stagnant at the same time the blog gets featured in a great Nashville Business Journal article, “Standing out on the Web: Tips to help your clients find your business online.”

The big news in the new year is that Bankruptcy filings are down nationwide, particularly in Tennessee and the south. In the article, one attorney says the decrease is an indication that the economy has turned the corner (or that everybody who was going to file bankruptcy has already filed).

I’m not so sure.  Throughout 2010, we learned that banks were reluctant to foreclose, either as a result of issues with their paperwork, being adverse to taking properties into REO, or being hopeful that the mortgage modification programs would help.

As we ended 2010, we learned that none of those factors were a long-term issue that would prevent foreclosure. I expect foreclosures to crank back up in the next few months. Plus, as more second and other junior lienholders come to the realization that their collateral lacks value, 2011 will bring more lawsuits on the underlying debt.

The rise in foreclosures, coupled with more deficiency lawsuits on unpaid debt, will likely make 2011 another strong year in Bankruptcy Filings.

Bah Humbug: Christmas is a Great Time of Year for Collections

Ok, I realize that this post drastically increases my chances for a visit from the Ghost of Christmas Past, but here goes: Christmas is a great time for collection of debt.

Here’s why: Debtors who run retail businesses probably are flush with cash, whose bank accounts can be levied against.

(Just in case Santa reads this blog, I’m not going to point out that individuals may have more cash this time of year than others.)

Under Tennessee law, you can garnish a judgment debtor’s bank accounts, and that levy will freeze and seize all of the funds in the account, which will be paid to the Clerk–and then to you.  The difficult part is discovering where the debtor has bank accounts and, then, catching that account while it has money in it.

Before you call me a scrooge, keep in mind that if the debtor doesn’t pay the creditor from this money, it’ll probably go to other creditors.  Make sure that you’re at the front of the line for payment. While smart research is the biggest step, effective collections sometimes depends on luck and good timing.

Ghost of Christmas Past, bring it on.

The Six Ds of Debt Collection

I went to Bankruptcy Court yesterday with a real collections expert. I won’t reveal name or age, but I’ll say this: he was telling me a story involving accepting weekly payments of 50 cents on a $50 judgment.  (That means he’s been doing this a very long time.)

While waiting for Court to start, he told me about the Six “D”s of Collection. When a borrower veers into one of these, you’re far more likely to be dealing with a bad account:

  • Death
  • Divorce
  • Drugs
  • Dice (All forms of gambling)
  • Diamonds (High rollers)
  • Doctors and Dentists

Some of these are obvious, and some might be offensive (sorry, Dr. Nickels), but all make sense.

And heaven help you if you just loaned money to a plastic surgeon with a weak heart who is celebrating his recent divorce with a trip to Las Vegas with an all inclusive stay at the Bellagio.

Creditor Rights Tip for Williamson County Court: Go to Merridee’s Breadbasket

If you do creditor rights legal work, you’ll end up in of court a lot, often in different courts in different counties.

As a result, you start to learn your “favorites,” whether it be a favorite judge, a favorite car ride, or, most common, a favorite lunch or breakfast place.

Here’s my Williamson County favorite: Merridee’s Breadbasket in Franklin. For 9am dockets, you can go over there for coffee, pastries, or a real breakfast. For the lunchtime foreclosures, you can get a great sandwich combo deal, which includes a giant piece of pie.

No, this isn’t an advertisement. But, yes, I was in Williamson County Chancery Court yesterday morning, and, yes, my day started over at Merridee’s.

A Trustee’s Powers in Bankruptcy: How the Trustee can Make Money for Creditors

Everybody is asking about the efforts of Irving Picard–the Trustee in the Madoff Bankruptcy–to recover the money lost by investors. His stated goal has been to recover all of the lost investments. The question is: How? (Or, Really?)

The goal of every bankruptcy trustee is to find money or assets to sell. In most cases (probably 98% of them), there are no assets (the people are broke and they owe money against all of their property).  Of other 2%, the assets recovered fall into three categories:

  • Actual, real assets:  The debtor has money, cars, property, or anything else of value that is lien-free, meaning they own it out-right, not subject to any creditor’s claim.  This is rare; most debtors stay out of bankruptcy in order to keep their assets away from a trustee.
  • Assets resulting from avoided liens:  Upon the filing of a bankruptcy, the trustee is granted an interest in the debtor’s property, called the “hypothetical judgment lien.” If any creditor’s lien on property is defective, the trustee can attack and eliminate that lien, thus creating a “lien-free” asset. Note to Secured Creditors: This is the most common way trustees find assets. 
  • Bankruptcy Lawsuits:  This includes lawsuits to recover preferential transfers, fraudulent conveyances, and various other post-petition actions. These types of actions aren’t rare, but they generally occur in the larger bankruptcy cases.

These are the most common weapons in a trustee’s arsenal. The Madoff Trustee is claiming that the alleged Ponzi scheme constitutes fraudulent transfers to the paid investors.  If he can recover all or most of the lost investments, he will have earned his money on this one.

Remember to Review Credit and Collection Procedures Every Year

I had lunch with a client today–actually, the Chief Financial Officer, the Regional Credit Manager, and my local Credit Manager (yes, it was a fancy lunch, and I was paying)–and, toward the end, the CFO asked a great question: Are we doing anything to hurt ourselves or our ability to collect our debt?

What a simple, effective question to ask yourself, and your attorneys, at least once a year.

My response was what they wanted to hear: they aren’t.

They have solid credit applications, which provide for recovery of attorney’s fees, late charges, and include/require personal guaranties of corporate debt. Their invoices are clear and include due dates and adequate descriptions of the services provided. Internally, they seem to have good practices for prompting action on past due invoices that preserve all applicable lien deadlines.

In other words, they aren’t creating any openings or holes for their borrowers to avoid repayment of debt. At year end, it’s a good idea to review your practices and documents, whether internally or with counsel, with an eye to addressing any issues.

In this economy, people are looking for any reason to avoid repaying their debt. Be proactive in eliminating those reasons.