The amount of influence creditors can exert over the debtor in bankruptcy situations varies substantially depending on the type of bankruptcy relief the debtor is seeking.

The chapter which requires the most diligence - and over which the creditor can have the most influence - is Chapter 11.

Chapter 11's are typically the largest bankruptcy cases. While they make up the smallest percentage of the three most common filings (Chapters 7,11, and 13), they typically involve the largest numbers of creditors and can eat up vast amounts of court time.

Chapter 11 is designed to permit businesses to reorganize. In order to effectuate the reorganization, the debtor must formulate a "plan of reorganization" which is subject to court approval. As part of the process, the debtor must disclose the terms of his plan to his creditors and must seek the consent of the creditors.

Although the court might approve a plan without the approval of the creditors, this is an avenue which courts prefer to avoid. Because the debtor needs creditors' approval, creditors can influence the terms of the plan and an alert creditor can often obtain treatment favorable to himself. There are several point during the process where the creditor can assert himself.

The creditor normally first learns of the filing of the case when he receive a "Notice of Commencement of Case" in the mail. The notice contains some vital information. It tells where the case was filed, the chapter which the case was filed under, and, most importantly, the date of the first meeting of creditors (sometime referred to as a 341(a) meeting because of the bankruptcy code section which requires the meeting).

Once a creditor is aware of the bankruptcy filing, he should not take any further action to collect debts owed to him by the debtor. The creditor can not continue any legal action which might have been commenced and, for the most part, cannot pursue any judgments which have been obtained prior to the filing.

Even though he is stayed from direct action, the creditor can be active. A simple, and often revealing, step is for the creditor, or his attorney, to obtain and review the debtor's bankruptcy petition. A careful inspection of the petition can often give the creditor an excellent understanding to the debtor's financial position and help him assess both the chances of a successful reorganization and the return which the creditor might expect to receive.

The creditor should make sure that the amount of his claim is properly scheduled and also check to see that the claim is not listed as either "contingent", "disputed" or "unliquidated." If the creditor finds himself in any one of those categories he should be aware that the debtor disputes the legitimacy of the claim and the creditor should then be particularly alert to defending his rights. Often the creditor will find that his claim is simply misstated (rarely for too large a sum).

In any Chapter 11 case, the creditor should promptly file a "proof of claim" with the clerk of the bankruptcy court. This one-age form is normally sent to the creditor along with the Notice of Commencement of Case. The form is easy to fill out and, if misplaced, a blank form can be obtained from the bankruptcy clerk or from most stationary stores. Documentation supporting the claim should be included along with the material filed with the court.

The next article in this series will discuss additional steps which can be taken by a creditor.

May 1999.
Reprinted with permission of the The Orange County Register.