Basics of Bankruptcy
Written by Garth Gavenda, Shareholder
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One of the most common challenges that lenders face is when a customer files for bankruptcy. It is essential that lenders have a fundamental understanding of the bank’s rights and obligations under the provisions of the U.S. Bankruptcy Code. Knowing what actions to take and, perhaps even more important, what actions not to take, is imperative.
Some basics that apply to each type of bankruptcy:
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Typically, you will be notified of the bankruptcy through service of a Notice of Bankruptcy concerning a borrower/guarantor/customer (referred to as a “Debtor” once the bankruptcy petition is filed).
- When a bankruptcy is filed, an automatic stay takes effect immediately.
- No action to collect any debt against the Debtor that arose prior to the date the bankruptcy was filed may be initiated, pursued, or continued, during the period of time that the automatic stay is in effect.
- Upon receipt of a Notice of Bankruptcy, you should update your system to ensure that you do not send any further statements to the Debtor.
- You should discontinue all communications directly with the Debtor.
- You should terminate any automatic withdrawals on loan obligations owed to you.
- You should review your relationship with the Debtor, i.e., do you have any loans with the customer, only a depository relationship, etc.
- However, if the bankruptcy only concerns a borrower of a loan (usually a business entity), communications and statements can still be sent to a guarantor, if a Chapter 7 or 11 bankruptcy was filed.
- There is a co-debtor stay that comes into effect with respect to a Chapter 13 bankruptcy.
- You do not have an obligation to monitor the Debtor’s use of funds on deposit.
- If the Debtor continues to make payments after the Bankruptcy has been filed, you may retain the payments.
- Calendar the time and date for the Meeting of Creditors (sometimes referred to as a “341 Meeting”).
- Also, depending on your relationship with the Debtor, you may want to consider attending or having your attorney attend the Meeting of Creditors.
- Calendar the date to object to discharge.
- This is normally the date that the Debtor will receive a discharge in a Chapter 7 bankruptcy.
- With respect to collateral, a creditor has the right to inspect and preserve its collateral after receiving a Notice of Bankruptcy.
- If a creditor wishes to inspect its collateral to make sure that it is being maintained and preserved, the creditor should coordinate the inspection through the debtor’s bankruptcy attorney.
- In the event that the debtor’s bankruptcy attorney does not cooperate with scheduling an inspection, we recommend contacting legal counsel.
- A creditor also has the right to make sure that the collateral is insured.
- Typically, the Trustee appointed to oversee the administration of the estate confirms that collateral is properly insured.
- However, this usually does not occur until the first meeting of creditors, which is held approximately 30 days after the bankruptcy petition for relief is filed. If a creditor is concerned about the insurance coverage, a creditor can reach out to the debtor’s bankruptcy attorney and request for proof of insurance.
- In the event that the debtor’s bankruptcy attorney does not cooperate or provide proof of insurance, we recommend contacting legal counsel.
- As to filing multiple bankruptcies, Debtors can usually do this.
- The Debtor’s right to an automatic stay and to obtain a discharge may be impacted by multiple bankruptcy filings, which depends on a number of factors.
- In instances where the bank receives multiple bankruptcy filings for the same customer, we recommend contacting legal counsel.
- Finally, essentially anyone “can” file for bankruptcy, even if they have very limited debt obligations.
If you have questions about actions to take when a customer files for bankruptcy, please reach out to Your Legal Department® at Anastasi Jellum, P.A.
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