Creditors are rarely surprised when they learn that an account has filed for bankruptcy protection. In most cases the account has been a troubled one on which payments have been consistently delinquent or missed altogether. Rather than simply writing off the account as a lost cause, though, creditors should keep in mind that they retain many rights in a bankruptcy setting. Failure to recognizing the nature of these rights can mean taking a total loss on an account when a partial or even full recovery is possible.

The filing of any bankruptcy petition gives rise to an automatic "stay." The stay is quite powerful. It means that no creditor can take any further action to attempt to collect a debt from the debtor. For instance, telephoning or writing the debtor to see if he will pay is forbidden, as is seizing property or bringing a suit in any court except the bankruptcy court. The stay does not prevent the creditor from protecting his rights however.

Creditors' rights vary depending on whether the debtor has sought protection under Chapter 7, Chapter 9 (a chapter which is rarely used but which is all too familiar to Orange County vendors), Chapter 11, or Chapter 13. Each of these chapters has common elements which this month's column will discuss. Future columns will discuss rights which are specific to each chapter.

Normally creditors learn that an account has filed for bankruptcy protection when they receive a "Notice of Commencement of Case" in the mail. The Notice of Commencement contains important information including the type of bankruptcy protection the debtor is seeking, the date and time of the meeting of creditors, the name and address of the trustee and, in a Chapter 7, whether the case is an "asset case" or a "no asset case."

In a chapter 7, or a Chapter 13 case, when the petition is filed an individual is appointed by the court to act as the trustee in the case. The trustee's job is to represent the interests of both the debtor and the creditors. The trustee administers the case and, when assets are available, it is the trustee who is responsible for distributing those assets to unsecured creditors. Trustees are private individuals who are often, but not always, attorneys. In most Chapter 11 cases, the debtor acts as his own trustee.

No matter what chapter a debtor has filed, near the beginning of his case he must attend a meeting of creditors. This meeting is often referred to as a 341(a) meeting because of the Bankruptcy Code section which requires it. The meeting is usually held about 30 days after the case is filed (longer when the filing volume is heavy).

Any creditor of the debtor may attend the meeting of creditors either in person or through his attorney. At the start of the meeting, the debtor is sworn in so that any statement he makes is made under oath. Often the questions asked at a 341(a) meeting change the course and the outcome of a bankruptcy filing. If a creditor believes that the debtor has acted in bad faith, is concealing assets, or owes a debt that is non-dischargeable (such as spousal support) the meeting of creditors provides a fine opportunity to question the debtor at minimal expense and under penalty of perjury. Answers may be evoked which can be useful at a later settlement conference or trial.

February 1998.
Reprinted with permission of the The Orange County Register.