Bankruptcy. The arrival of that notice stating a customer has filed for bankruptcy can evoke less-than-ideal responses: forwarding the notice to someone else who might know what to do with it (resulting in the notice ending up in a forever loop of being forwarded along); immediately writing off the account and cutting your losses; or, worst of all, ignoring the notice and proceeding as normal.
Such responses occur because most people haven’t been exposed to the nuances of bankruptcy law. This is a problem, as bankruptcy inevitably creeps into many business units, not just the bankruptcy or legal departments. Everyone who touches an account that is in bankruptcy should understand the special treatment it must receive and the potential consequences of noncompliance.
The top three bankruptcy pitfalls we see for our clients include:
- Not taking action soon enough (i.e., the deadline to file a proof of claim has already passed or the discharge has already been entered);
- Inadvertent, but prohibitively costly, violations of the automatic stay or discharge injunction; and
- Failure to establish and maintain business policies and procedures and account management systems that comply with bankruptcy requirements.
Clients can avoid these pitfalls by ensuring their organization has a working understanding of bankruptcy basics and how these requirements affect their business practices.
Introducing, Bradley’s Bankruptcy Basics
Are you in-house counsel at a financial services business that does not have a designated bankruptcy department? Are you in management at a bank or non-bank business that offers financing, leases, or merchant cash advances to customers who file for bankruptcy? Do you testify at or participate in court hearings, depositions, or mediations as a corporate representative in connection with bankruptcy cases or consumer protection and foreclosure lawsuits where customers have previously filed or will file for bankruptcy? Are you in the bankruptcy or litigation department of a financial services business and want a better understanding of bankruptcy concepts when communicating with outside counsel and making business decisions? If you answered “yes” to any of these questions, then Bradley’s Bankruptcy Basics is the resource for you.
Management, legal, and other business leaders can benefit from an understanding of bankruptcy law and its effects on their business operations. This will help ensure that the Bankruptcy Code and Bankruptcy Rules are not inadvertently violated. Additionally, a working understanding of bankruptcy concepts will help business leaders employ a cost-benefit analysis to continue to evaluate opportunities for collection, rather than simply writing off accounts that could otherwise have been partially collected. Further, a basic bankruptcy understanding will provide business leaders with the foresight to timely retain outside bankruptcy counsel when needed.
Bradley’s Bankruptcy Basics is a robust, multimedia series of to-the-point blog posts about common bankruptcy concepts and visual aids to be used as quick-reference guides. Over the course of the next several months, we will publish these blog posts, visual aids, and other multimedia content.
You’ve Received a Notice of Bankruptcy. Now What?
Bankruptcy cases move much more quickly than typical lawsuits. It is wise to begin reviewing bankruptcy filings and information about the account in bankruptcy on day one. This is especially true for chapter 11 bankruptcy cases in which so-called first day motions can drastically impact creditors’ rights. Use this resource from Bradley’s Bankruptcy Basics blog series to help you navigate your accounts through the initial steps.
Check the Dates. The notice of bankruptcy will include several important dates, including the date of the section 341 meeting of creditors, the deadline to object to a debtor’s discharge under section 727 or dischargeability under section 523, and the deadline to file a proof of claim. More information about each of those events will be included in forthcoming Bankruptcy Basics blog posts. Once you receive the notice of bankruptcy, it is important to calendar those deadlines to ensure they are not missed.
Flag the Customer’s Account and Halt All Collection Activity. Most importantly, once you receive a notice of bankruptcy or any other indication that a customer has filed for bankruptcy, you should flag the customer’s account and immediately halt all collection activity. This is vital to avoid a possible violation of the automatic stay.
- If your business has a specific bankruptcy department, the account should be escalated according to your business’s policies and procedures.
- Any scheduled repossession or foreclosure sale should be immediately canceled.
- If you already have the customer’s collateral in your possession, you should cancel any scheduled auctions or sales until it is confirmed that the collateral is not part of the customer’s bankruptcy estate.
- Additionally, the account should be flagged such that all communications go through the customer’s bankruptcy attorney, if he has one, rather than directly to the customer himself.
- Any debt collection activity, such as sending default or intent to accelerate letters or prosecuting foreclosure suits, should cease immediately.
- It is also wise to halt all collection activity as to related parties, such as non-filing spouses or guarantors, until it is confirmed that the automatic stay or co-debtor stay does not apply to them.
Review the Account. You should next conduct a review of the account.
- Is the account current?
- If not, what are the arrears?
- Does the account have one or more loans?
- Is there a lease, rather than a loan, on this account?
- Where is the collateral right now?
- Are any foreclosures or sales scheduled as to the collateral?
- Is there any pending litigation on the account?
Answering these questions and following along with the upcoming installments of Bradley’s Bankruptcy Basics will help you avoid exposure for stay and discharge injunction violations and strategize your next steps.