Bankruptcies are on the rise and as a creditor, it is important to understand the terminology used in the various court notices you will receive. Some common terms and situations are explained below. We hope you find this helpful.
1. What is an automatic stay?
2. What are the different "chapters" in bankruptcy?
3. What are bankruptcy trustees and what do they do?
4. What is a "no-asset" case?
5. How do I file a proof of claim?
6. What is an unsecured claim?
7. What is a preference or preferential debt payment?
8. What's the difference between a discharge and dismissal?
An automatic stay is an injunction imposed by the bankruptcy court that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor, the moment a bankruptcy petition is filed. There are some exceptions, but generally, if a creditor tries to collect a debt or take other action in violation of the Bankruptcy Code, they can be penalized.
Chapter 7 provides for liquidation, or sale of a debtor's non-exempt property, and the distribution of the proceeds to creditors. This is commonly referred to as a "straight" bankruptcy.
Chapter 9 provides for reorganization of municipalities, including cities, towns, villages, counties, taxing districts, municipal utilities, and school districts.
Chapter 11 provides for reorganization, usually involving a corporation or partnership. The debtor typically proposes a plan of reorganization to keep the entity functioning and repay creditors over time. Both individuals and businesses can seek relief under chapter 11.
Chapter 12 deals with a "family farmer," or a "family fisherman" as those terms are defined in the Bankruptcy Code.
Chapter 13 is best suited for individuals with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
Chapter 15 (uncommon) deals with cases of cross-border insolvency between the U.S. and a foreign country. This new chapter was added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
A trustee is a representative of the bankruptcy estate appointed by the court, who exercises statutory powers for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or corporation appointed in all chapter 7, chapter 12, chapter 13, and some chapter 11 cases.
The trustee's responsibilities include reviewing the debtor's petition and schedules, bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors. Trustees in chapter 12 and 13 have the additional responsibilities of overseeing the debtor's plan, receiving payments from debtors, and disbursing plan payments to creditors.
In a chapter 7 case, if all of the debtor's assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases. Unsecured creditors will be told not to file claims, as there will be no money to distribute. Even though the bankruptcy begins as a no asset case, the trustee may find assets as the case moves forward. If that happens, the trustee will send out a subsequent notice to creditors and this will advise that assets have been found, and the creditors will have an opportunity to file claims.
Many initial bankruptcy notices will have an attached proof of claim form. (Click here to obtain a standard B10-proof-of-claim form.)
Most general unsecured creditors will have an "unsecured nonpriority claim". The claim form should be self-explanatory. Fill in the appropriate blanks and attach sufficient documentation to support your claim, such as a statement, invoices, application, personal guarantee, etc. Make a copy of the executed proof of claim form and mail it to the bankruptcy court (the address will be on the notice), along with a self-addressed, postage paid envelope. Ask the court to time-stamp the copy of your proof of claim and send the time-stamped copy back to you in the postage paid envelope. This serves as proof that your claim was received and filed.
In cases where you have retained CST Company to file suit and obtain judgment, it may be a good idea to file a proof of claim through CST Company. The judgment will often serve as a lien on real estate and this can come up at various times during the bankruptcy proceedings. By having the claim filed through CST Company, or the local attorney CST Company obtained for you, your interests can be protected if such a situation develops, and CST Company or the attorney can immediately act in your behalf.
An unsecured claim is debt for which a creditor holds no special assurance of payment, such as a mortgage or lien, or a debt for which credit was extended based solely upon the creditor's assessment of the debtor's future ability to pay. Most of your claims will fall into this category.
Any payment made to a creditor for a pre-existing debt in the 90 day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than it would otherwise receive if the debtor were liquidated in a chapter 7 bankruptcy, is considered preferential. The debtor or a bankruptcy trustee has the right to sue the recipient of a preference payment to recover it for the benefit of the bankruptcy estate, subject to certain defenses. Although this type of transaction usually involves money, it can also pertain to a return of merchandise.
If a debt is discharged in bankruptcy, it can no longer be collected. If a bankruptcy is dismissed, there is no longer an automatic stay in effect and creditors are free to proceed to collect their claims.
For general questions regarding bankruptcy, or if you need further insight, feel free to contact your local sales representative or our Louisville office (800-626-5873). This information is intended to be informational only, and does not constitute legal advice. We suggest you consult with your legal counsel if a specific opinion is desired.