Although there are other Chapters under which debtors
may seek relief, Chapters 7 and 13 are the most frequently encountered.
Chapter 7
Chapter
7 involves a discharge of debt by court order.
While secured debts may be routinely "reaffirmed", unsecured
debts normally are not. Traditionally,
debts have been reaffirmed through a Reaffirmation Agreement. The Courts of the Eastern District of
Virginia have held, however, that creditors cannot force debtors to execute
reaffirmation agreements if they were not in default at the time of the
bankruptcy filing.
Why
would a debtor want to pay a debt when he has filed for Chapter 7 relief? The answer is future credit. The possibility of future credit can be
sufficient incentive to encourage voluntary repayment for at least two (2)
reasons:
1. Debtors want and need future credit
after bankruptcy discharge, and
2. Reasonable credit after bankruptcy is
very difficult to obtain as bankruptcy carries a stigma. Absent special circumstances, the only credit
card a debtor may obtain after bankruptcy is a "secured" credit
card. These cards are tantamount to a
line of credit drawn upon account deposits pledged as security. There are also user fees and high interest
rates.
How do
you encourage debtors to voluntarily pay their pre-bankruptcy petition
debts? Consider adopting the following
written policies:
1. Post-bankruptcy credit may be extended
to debtors who voluntarily pay their dischargeable debts ("the
carrot").
2. No future credit or services, other than
those required by law, will be extended to debtors who have caused you a loss
by bankruptcy or otherwise, unless the debt is voluntarily repaid (“the
stick").
How do
creditors inform their debtors of this policy once a petition of bankruptcy is
filed? Consider sending a letter
directly to the debtors’ counsel asking that counsel advise their client of the
policy.
Chapter 13
Chapter
13 involves a "reorganization" of the debtor's finances. The debtor is required to devise a plan for
repayment: 100% for secured debts and a court-approved percentage for unsecured
debts. Creditors are paid in the order
of priority - preferred (taxes), secured, and finally, unsecured. Creditors are required to file proofs of
claim with the Bankruptcy Court to protect their place in the plan. Plans can take up to five (5) years to
complete.
Co-Makers
When
can you proceed against co-makers? In
Chapter 7 you can proceed immediately.
In Chapter 13, you have to either wait until the plan pays out, or petition
the Bankruptcy Court to lift the automatic stay against the co-maker. Once this is granted you can proceed against
the co-maker for the percentage not paid by the plan. Although you are required to file the motion
to lift the stay, the court is required to grant your relief.
Planning
Summary
Regardless
of the Chapter, the best way to minimize your bankruptcy loss is to be secured.
In Chapter 13 cases, security can mean
the difference between payment at 100% rather than at a nominal
percentage. In Chapter 7 cases, security
can mean the difference between reaffirmation or no payment at all. In either Chapter, collateral is the key.
The
second best protection from bankruptcy loss is having a solvent co-signer. The old saying "two heads are better
than one" can mean much in bankruptcy, especially when your co-signer is
not a spouse. Generally, spouses do not
make good co-signers because they can file a joint petition for bankruptcy and,
in fact, often do because family finances are inter-related. It should be noted, however, that in a case
of jointly owned real estate, a spouse's signature is necessary in order to
perfect a lien against any real property.
