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Bankruptcy creditors Preserving your rights

Atone time or another, most businesses Ð and many individuals – have received an official document from a bankruptcy court, bearing a title like: “Notice of (Chapter 7, Chapter 11 or Chapter 13) Bankruptcy Case, Meeting of Creditors, & Deadlines”.

What do these notices mean, and how should you react or respond to them?

The notice is intended to inform all interested persons that a bankruptcy has been filed, and that there are important deadlines and events coming up in the bankruptcy case. If you receive one of these notices, that means that your name, or the name of your business entity, is on the master mailing list filed with the bankruptcy court by a bankruptcy debtor at the outset of his bankruptcy case. And your name will be on that list if you have at least a possible stake in the outcome of the bankruptcy.



A bankruptcy debtor, if he has received good legal advice, will include on the master mailing list every person or entity who could conceivably have a claim against the debtor, even if the claim is disputed or the debtor believes the claim has been paid. The reason why bankruptcy debtors tend to be over-inclusive in preparing the master list is that the discharge of debts, or confirmation of a bankruptcy plan, will only be binding on a creditor if the creditor has been made aware of the bankruptcy case.

In most cases, if you receive a notice of a bankruptcy filing, it is because the debtor owes you money, or is a party to a lease or other agreement with you under which the debtor has obligations. But sometimes you will receive a notice because the debtor believes you do not have any valid claim, and wants to be sure that the bankruptcy court disposes of any claim you might have against him. When the debtor gets around to filing his schedules of assets or liabilities Ð usually a couple of weeks after the commencement of the bankruptcy case Ð he will list each individual debt and indicate whether it is disputed or contingent. It is not uncommon for a debtor to list a creditor on his schedules but indicate a debt amount of zero. For example, the debtor may list the IRS on his schedules in order to establish that he owes no money to the IRS; because the IRS receives notice of the bankruptcy, it will have to affirmatively assert any claim it may have.




Sometimes businesses receive notices of bankruptcy filings by debtors whose names are unfamiliar or do not appear on the books and records of the business. In such cases, do not simply discard the notice; it is wise to contact the debtor (in a Chapter 11 or 13 case) or trustee (in a Chapter 7 case) to find out why your name was included on the master list.

Whether or not the debtor schedules his debt to you as disputed or undisputed, contingent or non-contingent, it is still advisable to file a formal “proof of claim” in the bankruptcy case. In theory, if the debtor lists his indebtedness to you on his schedules in the correct amount, and as undisputed, you are not required to file a proof of claim; but schedules can be changed by amendment, so it is always a good idea to be on record with the court regarding the amount you believe you are owed.

The notice of bankruptcy will include important deadlines. First, there may be a deadline for filing a proof of claim. In Chapter 7 (liquidation) cases, the notice may set forth a claims deadline, or it may say that it does not appear that there will be assets in the bankruptcy estate with which to pay claims, and that a deadline will be set later. In Chapter 11 (business reorganization) cases, the notice will inform recipients that a claims deadline will be set at a later time. And in Chapter 13 (individual debt adjustment) cases, a fairly quick deadline for claims will probably appear on the notice. Keep in mind that things can happen very quickly, especially in Chapter 13 where a binding debt adjustment plan can be confirmed in a matter of one or two months.

The notice will also set a date for the first meeting of creditors. All creditors may (but are by no means required) to attend this meeting, where they can ask questions of the debtor. The notice also will set a deadline to object to any exemptions asserted by the debtor, which deadline will normally be 30 days after the conclusion of the first meeting of creditors.

Finally, the notice will set forth a deadline for filing a complaint to object to the discharge of any particular debts. A detailed discussion of the grounds for such a complaint are beyond the scope of this week’s column, but for now, suffice it to say that if the debtor has incurred a debt through fraud, breach of trust, or willful injury to property, it may be possible to prevent the debt from being exonerated or compromised in bankruptcy. A complaint to object to discharge initiates a lawsuit within the bankruptcy case.

All these deadlines are important, and it is advisable to consult a bankruptcy attorney concerning how to respond to them.

Another prudent thing to do, if you receive a notice of bankruptcy and believe you are a creditor, is to file with the court (and serve on all parties in interest) a “request for special notice”. This is a short document that is designed to ensure that you receive notice of all proceedings in the bankruptcy case. The fact that you received the notice of bankruptcy from the court should ensure that you continue to receive notices, but don’t count on it Ð file and serve the request for special notice anyway.

If you are a bankruptcy creditor, it is sensible to make sure you take the necessary steps to obtain notices and keep abreast of developments in the case. You may or may not ultimately collect much of what you are owed, but you do not want to lose your rights because of failure to meet a deadline or file a paper.

Peter C. Bronson, of Nevada County, is a partner in the Sacramento offices of Kelly Lytton & Vann LLP. His law practice emphasizes creditors’ rights, insolvency, commercial litigation and mediation. Write him at pbronson@klmvlaw.com. This column is not intended as legal advice in any specific business situation or dispute; specific strategic decisions always depend upon the specific facts.


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