10 Bankruptcy Myths For Creditors

1. If the bankruptcy debtor has a mortgage or UCC-1 against the property used as collateral for a debt, it is secured and will have to be paid.

Usually, but not always. If the contract or mortgage was executed within the preference period, and there was no new value, the lien may be set aside as a preference. Also, mortgages can be stripped or crammed down in a chapter 13 case. Lastly, if the mortgage or UCC-1 is defective, not recorded correctly or improperly assigned, the debt may be unsecured and discharged.

2. If the debtor leases real estate premises (or equipment) and files bankruptcy, all of the lease payments will have to be paid or the leased property (or equipment) will have to be returned.

Not always. The pre-petition lease payments are unsecured, and are subject to discharge like other unsecured debts. The debtor may avoid the post-petition lease payments. The debtor has the right to reject the lease, and leases expire automatically after a period of time. If you have not taken steps to protect your rights, the debtor can reject the lease, or there may not be enough money in the estate for the payment. This is true of leases and other executor contracts and agreements.

3. If a company goes bankrupt, you cannot continue to do business with the debtor.

No. Post petition dealings with the debtor are separate from pre-petition dealings. So, you can do business under business law with a bankrupt debtor that still operates and has resources. However, the post petition contracts and agreements must be carefully separated from the pre-petition ones so it doesn’t appear that the creditor is trying to collect a pre-petition debt.

4. If the debtor transfers money or property to someone, there is no way to get it back.

No. The trustee or a committee may sue to get back any money or value improperly transferred to anyone in an effort to cheat the creditors and may avoid contracts and agreements.

5. If a debtor files bankruptcy, but you don’t get notice until after the case is over, the debt is not discharged and you can collect.

Not always. This is one thing about bankruptcy law that is very different than usual business law, real estate law, property law or estate law. If a creditor doesn’t get notice, and there are no assets to distribute, the debt is discharged. If there were assets to distribute, and the creditor didn’t get it’s share due to the lack of notice, the creditor has the right to re-open the case, have the discharge of the debt revoked, and then try to collect. This would only make sense for substantial debts of a debtor with real estate, intellectual property, or business assets.

6. If the business has assets, the creditors get paid something for their debt.

No. Often the assets have little or no value, and any money that results from a liquidation auction goes to priority or secured business and real estate creditor’s or administrative claims.

7. If the trustee or committee sends out an “Asset Notice”, the creditors will be paid something for their debt.

No. Often the assets have little or no value, and any money that results from a liquidation or foreclosure of property and land goes to priority or secured creditor’s or administrative claims.

8. You have to have an attorney for bankruptcy to file a bankruptcy proof of claim form.

No. These forms are meant to be easy to file by creditors, are often available on court websites and are simple enough so no bankruptcy lawyer or legal advice is necessary.

9. If a creditor does not file a proof of claim, the debt cannot be discharged.

No. If the debt is listed by the debtor, it will be discharged even if the creditor does nothing. Additionally, the trustee or the debtor law office can file a proof of claim for any creditor to make sure the debt is discharged.

10. If you have a mortgage against the debtor’s property and land or business and real estate, and the debtor is granted a discharge, you cannot foreclose.

No. A discharge eliminates personal liability or court claims of an individual debtor, but does not eliminate a lien created by a mortgage or financing statement under the law of property. Business entities do not get a discharge.

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