Beware Of Bankruptcy

August 9, 2023


A judgment debtor filing for bankruptcy protection is about the worst judgment recovery roadblock a judgment owner can face. As soon as you find out that your judgment debtor has filed for bankruptcy protection, you must cease all judgment and debt collection activities. My articles are my opinions, and not legal advice. I am a Judgment Broker, and am not a lawyer. If you ever need any legal advice or a strategy to use, please contact a lawyer. Bankruptcy laws change often.

When a person or entity files for bankruptcy, their automatic bankruptcy protection stay starts. The automatic stay applies to any of the debtor’s known (and sometimes even their unknown) debts, including all lawsuits or judgments that originated prior to their bankruptcy filing. The automatic stay prohibits all collection actions against the debtor or their assets. After a bankruptcy filing, it is a violation to even make a telephone call to the debtor, asking them about payment about any of their judgment-related or other debts.

11 USC § 547(b)(3) states:
(b) EXCEPT AS PROVIDED IN SUBSECTIONS (c) AND (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property – (3) made while the debtor was insolvent; And under § 547 (c) (8) and (9) it states, (8) if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or (9) if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,850. (This amount is adjusted every 3 years.)

While 11 USC § 547 states that if payments made from a debtor to you are received within 90 days prior to their bankruptcy petition (if less than $600 for consumer debts and less then $5,850 for non-consumer debts), then the Trustee will not order a preference (reachback) repayment. However, Trustees can get away with whatever they want to get away with.

If a Trustee demanded a garnished amount of $500, it is most cost effective to just pay them, rather than try to fight it and risk sanctions and hassles. If you receive money from a debtor (by whatever means – garnishment, payment plan, payoff) and it is less than the limit, you should be OK. If it is more than the limit, then wait to see if you receive a letter from the Trustee demanding it back.

Most creditors do not automatically return money received during the 90 day period, however they do make sure ongoing levies stop. If you get a letter from the Trustee citing § 547 and demanding the money back, then return it right away to avoid sanctions. While a bankruptcy court trustee most likely will not fight over a $700 payment because it is not cost efficient for the trustee. However, the debtor’s attorney might cause trouble and bring an action against the creditor for refusing to follow the guidelines of the automatic stay. Bankruptcy attorneys are usually looking to make trouble/money, especially if they are paid by the hour.

The original intent of the (1841) section of the BK code was to eliminate transfers of the debtor in anticipation of their BK filing. It still pertains to preferential payments made by the debtor (that is, voluntary transfers by the debtor themselves to a creditor). While the Trustee has the right to avoid a debtor transfer, even if unavoidable, within 90 days prior to filing their petition, and thus any monies seized in the 90 days prior to the filing belong to the debtor, not the trustee.

The trustee must commence an adversary proceeding (i.e., a new lawsuit in bankruptcy court) against you, to have a preferential transfer set aside. If it goes to trial and they win, you will be liable for the amount of the preferential transfer and costs of suit. I know of no statute that allows the trustee to collect attorney fees against a third-party and I have never heard of attorney fees being awarded in such a case. If you roll over and pay the money before trial, there is a good chance you will not get hit with costs, especially if the payment is part of a negotiated settlement.

A preferential transfer case will follow all of the classic rules of commencing a new litigation. The trustee and their attorney will need to weigh the likelihood of winning and then actually collecting the judgment. If the amount in question is under a certain threshold (e.g., $10K), it will probably not be worth their time and effort to go after it. It is a bright line test, so there should not be any significant doubt as to who would prevail at trial. I suppose one should reasonably consider the possibility of sanctions under FRCP Rule 9011, but you will have notice of such a claim and an opportunity to withdraw your defense, if applicable.

Therefore, small transfers are not really a concern for the BK Trustee, because they are more concerned about the stay of enforcement itself. And, it would be a violation of that stay to retain the money seized or garnished which “belongs” to the insolvent debtor. Monies seized within the 90 day period have to be released to the debtor (not the Trustee) as part of their 20K+ “wildcard” assets they are permitted to keep. Section (b) (3) of 11 U.S.C. § 727(a)(1) code states the trustee may avoid (undo) any debts paid while the debtor was insolvent.

The automatic bankruptcy stay is completely automatic. It starts at the date and time of the bankruptcy filing. The automatic stay does not depend on a written order from a judge, for the bankruptcy stay to take immediate effect. If anyone, including a judgment creditor, willfully violates a debtor’s automatic stay, they can be found to be liable for damages, attorney’s fees, and sometimes also punitive damages. If you did not intentionally violate the bankruptcy stay, and return the money/release the levy, as soon as you learn about the bankruptcy, it will be hard for anyone to hold you liable for sanctions.

If a judgment debtor filed for bankruptcy, once you become aware of that, you had better return whatever property you seized. Hoping for the bankruptcy to be dismissed and keeping the property is like playing with fire. You do not want to have a trial in the bankruptcy court over a violation of the automatic stay. You will lose. And the longer you fight it, the more expensive it’s going to cost you.

I have seen bankruptcy filed with “slightly wrong” SS# numbers, and/or a “slightly wrong” spelling of the name, and I have seen a few that did not make the debtor’s credit report even though everything was perfect. If you cannot find the debtor on PACER using their last name and last four of their SS#; try misspelling the last name by one letter.

In community property states, the automatic stay also usually prohibits a judgment owner from pursuing the enforcement of their judgment against the community property assets of the judgment debtor’s spouse. When a creditor suspects that their debtor or their spouse has filed for bankruptcy protection; they should halt any judgment enforcement or debt collection activities, until they can verify that a bankruptcy filing has not taken place.

The automatic stay starts at the time of the debtor’s bankruptcy filing, whether it is a chapter 7, 9, 11, 12, or a chapter 13 bankruptcy case. The stay remains in effect until the bankruptcy case is closed, denied, dismissed, or until the discharge of the debtor’s debts is granted. The bankruptcy can be dismissed if they debtor did not pay the fees, complete the forms, or credit counseling, or show up for the 341 meeting.

Sometimes if a creditor catches a lie on the bankruptcy schedules, the debtor will ask for a voluntary dismissal. If your judgment or debt gets discharged in the debtor’s bankruptcy, it is game over, your judgment or debt is dead. Of course, the debtor is still free to pay you even after your debt/judgment has been discharged, but that happens very rarely.

While there are some judgment debts that may ultimately survive their judgment debtor’s filing for bankruptcy protection, you must still honor the automatic stay for as long as it lasts. Automatic stays usually last as long as the bankruptcy court case is open. If a creditor files an adversarial motion (expensive and not guaranteed to work) and the bankruptcy judge signs an order, the creditor may get a leave of the automatic stay, and be allowed to recover the debt or judgment, while other creditors will not be allowed to recover from that debtor. Debts under 523(a)(15) (including equalization debts and attorney fees), may be discharged in a Chapter 13 bankruptcy.

Another example of how powerful bankruptcy is, the way they affect assignment orders. As an example, what if you served an assignment order on renters paying your judgment debtor, and they do not pay you, and your debtor files for bankruptcy protection 2 months later. You cannot sue those renters for not complying with the assignment order because that would violate the bankruptcy stay against your judgment debtor’s assets.

Start at www.pcl.courts/gov”. When looking up BK cases, the the devil is in the details.

Bankruptcy is usually fatal to the enforceability of judgments, so it is the number one enemy of any judgment recovery. If you suspect your judgment debtor has or will file for bankruptcy protection, it is a good idea to verify their bankruptcy status before each step, using PACER; the government’s Federal Court web site. PACER is very cheap, and almost mandatory for everyone that recovers judgments or debts.

Bankruptcy is so serious, it can be abused by debtors to fool creditors. For every three debtors that threaten to file for bankruptcy protection immediately, one actually does. Bankruptcy is so serious that many creditors do not verify the bankruptcy filing, they just walk away.

Another trick certain debtors try, is to file for bankruptcy protection, however they never follow through on their bankruptcy case. They only file so that they can get the automatic stay. Some debtors will file for bankruptcy but not follow through. It can be a ploy to get money back that you levied. It can also be that their home is being foreclosed on and they want a few more months to catch up.

Many creditors assume the bankruptcy filing means that their money judgment is automatically discharged, however that only happens after the debtor’s bankruptcy successfully concludes and the court orders that. That is one more reason to get and use a PACER account.

While a bankruptcy case is “open”, a creditor must wait. A bankruptcy can be held open for an unbelievable amount of time for a number of valid reasons. Even though the vast majority of chapter 7 BKs close in 110 days, some are open for years. If your debtor files for a Chapter 13 BK, it may be 5 years before it closes. The 341(a) creditor’s meeting is Also, a judgment entered during a Ch-13 bankruptcy filing judgment is not enforceable until the case is dismissed or terminated.

Judgment owners should stay informed about their judgment debtor’s bankruptcy court status. If their debtor’s bankruptcy case gets dropped, dismissed, or denied, the judgment creditor is then free to crank up the judgment recovery machinery once again. Assignees of record usually have the right to appear in bankruptcy court (at least with their attorneys), some cites are:

Ota v. Samsung Elecs. Co. (In re Ota), 192 B.R. 545 (9th Cir. BAP, 1996) (Assignee’s right to pursue denial of discharge under section 727(a).)

In re Boyajian, 367 B.R. 138 (9th Cir. BAP, 2007) (Assignee’s right to pursue claims to determine dischargeability of particular debts under section 523.)

Under 11 U.S.C. 101(5), a “claim” is defined as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured . . . .” “Congress intended by this language to adopt the broadest available definition of “claim.'” Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (citation omitted).

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