The filing of the bankruptcy imposes an "automatic stay". The moment the bankruptcy is filed all collections against the debtor must cease. The stay gives the debtor breathing room to allow it time to evaluate and take action on the debts it will remain responsible for, whether through a plan or a discharge.
Types of Bankruptcy
There are five (5) types of bankruptcies, known as Chapters 7, 9, 11, 12 and 13 of Bankruptcy Code 11 USC 362.
The two frequently individually filed bankruptcies are:
Chapter 7 – This is one of the two most used bankruptcies. A straight forward Chapter 7 bankruptcy will last for about five (5) months. The debtor in a Chapter 7 is saying to the court and its creditors it has no money to pay off its debts and asks the court to discharge all of its unsecured debt and to relieve it from any personal responsibility to all of its pre-petition debt. A Proof of Claim is not to be filed unless the court notifies the creditors that the case is an Asset Case.
Chapter 13 – This is a reorganization bankruptcy in which the debtor attempts to retain its property and seeks approval of a payment plan (Chapter 13 Plan) through the bankruptcy court to pay off the pre-petition debt. This type of bankruptcy can last for 3 to 5 years. A Proof of Claim should always be filed. The Chapter 13 Plan should always be reviewed to determine if your interest is adequately protected therein.
The remaining types of bankruptcies are:
Chapter 9 – Bankruptcy used by municipalities – a political subdivision or a public agency.
Chapter 12 – This bankruptcy is used for family farmers and fishermen. This is similar to an 11 in that the debtor reorganizes and pays off debt from future earnings. The debtor maintains its assets.
Chapter 11 – This bankruptcy is used by an entity or person with an operating business. This type of bankruptcy can be seen as a combination of a Chapter 7 and a Chapter 13. There may be a liquidation of assets to pay creditors. Debtor is in Possession of assets instead of a bankruptcy trustee.
Bankruptcy Related Forms
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Relief from the “Automatic Stay”
The grounds to seek an Order for Relief vary depending on the bankruptcy Chapter. In a Chapter 13, the more common ground for relief is lack of adequate protection (i.e. debtor’s failure to make post-petition payments). In a Chapter 7 bankruptcy the most common ground for relief would be the property in question has no equity and is of no value to the bankruptcy estate. Order for Relief is granted to the moving creditor(s) only and is for a specific real or personal property in the bankruptcy estate.
Communication with Debtor
No collection action should be taken during the automatic stay.
That includes anything written or spoken with the attempt to collect the debt. If the debtor contacts your office and asks for a reinstatement or payoff amount we can provide this information. If there is communication with the debtor initiated by the creditor and the debtor is represented by an attorney, any and all communication should be through the attorney unless the debtor initiated the communication. It is recommended that the debtor’s attorney be copied on a response to the debtor.
Payments Received during a Bankruptcy
Payments received during a Chapter 7 should not be accepted. However, if the discharge has been entered the payment can be applied to the post-petition (after the bankruptcy filing date) mortgage payments.
It is good to get the approval of the attorney for the debtor to take in such payments.
In a Chapter 13 bankruptcy, it should be determined first who is sending the payment. Payments received from the debtor should be applied only to the post-petition mortgage payments due. Payments received from the Chapter 13 Trustee should be applied to the pre-petition delinquency.
How Bankruptcy Effects Foreclosure
As your Deed of Trust would have been recorded prior to the bankruptcy filing, you would have a secured interest.
Therefore, any discharge would not preclude you from proceeding with the foreclosure once the automatic stay has been lifted. It is important to make sure the debtor does not strip your lien during the bankruptcy process.
Bankruptcy stays all actions.
A sale will not be valid if a bankruptcy is filed prior to the sale taking place. If the sale takes place before the bankruptcy is filed, the Trustee’s Deed Upon Sale (TDUS) can be recorded within 15 days to perfect the sale. There is some argument that the TDUS cannot be recorded because of the bankruptcy. Many in the industry believe the recording of the TDUS is allowed by title and is a continuation of the pre-petition sale.
How can we help?
S.B.S. can monitor the status of the bankruptcy, file a Proof of Claim and or/ Motion for Relief, file an objection to Chapter 13 plan and communicate with debtor and its attorney. Utilizing our in-house bankruptcy service will relieve you from finding an attorney as well as assure unified focus on your matter.