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Bankruptcy cases are designed to move quickly, as they are considered to be largely a matter of procedure. Debtors are supposed to supply creditors ample notice of a bankruptcy filing so that they have time to respond, but the window is still tight. Creditors will need to scramble quickly to assess their situation, determine options, and move forward with the most advantageous legal strategies available to minimize losses.A bankruptcy rights lawyer leans over a document he is writing on in his office.

New Mexico Financial & Family Law has served our local business community for decades, and we are prepared to assist you if someone who owes you a debt is filing for bankruptcy. We have deep experience with handling bankruptcy cases, including all of the familiar motions and procedures that can occur. Regardless of whether your debtor is an individual or a business, we have strategies we can recommend in order to help you pursue your business goals and seek the optimal outcome.

There’s only one catch: time is limited. Act quickly, and reach out to our offices today to get prepared for the bankruptcy process ahead. Call us at (505) 503-1637 or contact us online to schedule your no-risk consultation appointment with one of our experienced New Mexico bankruptcy lawyers.

Actions for Protecting Creditors’ Rights During a Bankruptcy

If you can respond quickly enough, you may be able to assert your rights and recover certain assets or debts using the following strategies.

Lifting the Automatic Stay

The “automatic stay” in bankruptcy is very powerful, and it protects the debtor and its property while the case is pending.

A debtor may be in possession of property that is has a lien by a creditor or is leased. The debtor may have no right, for various reasons, to possess the property after the case is filed. However, the creditor must usually ask the bankruptcy court lift the automatic stay in order to obtain the property.

Protecting Cash Collateral

The bankruptcy code has a unique term for money that is subject to a lien: “cash collateral.”

The bankruptcy code says that “cash collateral” cannot be used without agreement or court approval. However, many debtors may not know that a business lien includes the money used in the business.

A creditor can sometimes bring a bankruptcy case to a halt by asserting its “cash collateral” rights. If a business cannot use its cash, then it cannot proceed. Sometimes courts will disallow the use of the cash collateral, and the case effectively ends. More often, the court puts very tight restrictions on the use of the money and will often require ongoing payments to the creditor.

Reclamation of Property

Under certain circumstances, a seller of good can have the bankruptcy court order the return of the goods received within 45 days of the bankruptcy. It can also cancel an order for goods in transit that have not yet reached the customer.

Goods received within 20 days of submission of the bankruptcy petition can also incur administrative expenses, which can be recovered by the creditor if they move quickly to establish their losses. Otherwise, they could find themselves on the lowest priority of creditor, making it unlikely to see any repayment at all.

There are several technical and specific conditions attached to these rights. Creditors and goods suppliers must provide proof of the transfer, its cash value, and its dates to the satisfaction of the court, and they must also establish that their actions are not in violation of the order for an automatic stay on collections.

The bottom line is that it takes time and effort to submit requests for reclamation, otherwise the right is lost forever.

Deadline for Proof of Claim

Once the petition for bankruptcy is submitted, creditors have a limited window set by the court in order to submit their claims for debts. While submission of proof of claim uses a one-page form and does not technically require an attorney, the truth is that there’s a wide margin for error. Without legal expertise, creditors could accidentally misinterpret specific fields, or they may accidentally misrepresent the debt they are owed, risking any chance of repayment.

It is best to begin working with an attorney as soon as possible once you are notified that a debtor is filing for bankruptcy, as you will need to ensure that your documentation is thorough, accurate, and submitted before the deadline.

Establishing Claim Priority

Creditors are re-paid (if any repayment is made) during a bankruptcy according to their order of priority, as set by the U.S. Bankruptcy Code. All creditors in the same tier of priority are supposed to be paid pro rata, ensuring that no one is given preferential treatment except according to their category of debt held by the petitioner.

Unfortunately, most bankruptcy cases will fail to see all creditors repaid. Instead, creditors in higher tiers often eat up the “lion’s share” or recoverable interests, leaving those on the bottom tiers with nothing.

Priority matters a great deal, in other words, so you will want to be sure that you as an individual or business are represented accurately in declarations. For example, you want assurances that your debt is listed as secured rather than unsecured, if it is applicable, in order to reduce the risks of an inappropriate discharge of that debt.

Creditors can petition to have their position of priority changed, based on substantial factual information. Often, one of the best ways to accomplish this goal is to attend the §348 meeting of creditors. There, creditors can ask questions of the debtor and force clarifications, in the presence of the case trustee, who may then revise priority orderings based on the information brought to light.

Often, waiting past the meeting of creditors can make it difficult or impossible to have your priority position revised.

Alleging Non-Dischargeable Debt (Such as for Fraud)

Certain debts cannot be considered as eligible for discharge or part of the reorganization plan. Creditors have the opportunity to declare possible ineligible debts, such as by proving a fraudulent transfer or malicious intent on the part of the debtor to avoid having to repay.

Raising these concerns early increases the chances that the petitioner will be forced to still pay these debts, even during the automatic stay and possibly even after the case concludes. Waiting too long can mean that the debts are already formally considered eligible for discharge, or that they are made part of a repayment plan that only recovers creditors pennies on the dollar for the debts they are owed.

Right to Object, and Dismissal of Bankruptcy

Creditors have the right to object to the liquidation or reorganization plan if the plan creates unreasonable and undue hardship — or if it shows an unacceptable level of preference to certain creditors.

In some cases, a creditor can even have a bankruptcy dismissed, especially if the debtor is not holding to the word of their agreement, such as by not making timely payments according to their Chapter 13 plan.

Critical Vendors for Business Bankruptcies

When a business files for Chapter 11 bankruptcy, they are not supposed to incur new debt, which can mean they are unable to purchase goods or services if the costs of those is significant. In some cases, though, those goods and services are vital to the operations of their business.

Being unable to continue operations can make carrying out a Chapter 11 or Chapter 12 reorganization impossible. Creditors who catch wind of this can object to the petition, on the grounds that the business will make itself even more insolvent and incapable of operations, often forcing them to instead convert their petition to a liquidation plan.

Chapter 11 and Chapter 13 Creditors’ Committees

Reorganization plans are supposed to be overseen and approved of by a committee of representative creditors. Members of this committee can offer critical input, including both for repayment plans as well as for the operation of the business and its finances while the petitioner remains under distress.

There is a limited window to request to be a member of this committee, and decisions on the committee will move fast once plans start being proposed and approved of. Having an attorney represent and advise you provides you with substantial resources to ensure that your wishes, concerns, and ideas are heard and considered as part of the creditors’ committee.

Reporting Non-Compliance by Debtor

Failure to comply with the terms of a bankruptcy plan can result in summary dismissal of the case. Creditors are in a unique position to report non-compliance, especially if they are supposed to be receiving payments or a share of proceeds from sale of assets.

Petitioners can also be found to be non-compliant by virtue of their own financial activities during bankruptcy, such as by continuing to spend in excess of their ability to repay.

Supplying grounds for dismissal of the case can quickly lead to removal of the automatic stay, allowing for collection actions to resume.

Record Preservation

Financial records can disappear fast, as can things like invoices for goods and services. Work with an attorney to ensure your relationship with the debtor is well-documented and that you are capable of fully and accurately representing all obligations they currently hold to you.

Start Preparing for Your Customer’s Bankruptcy Today When You Reach out to Our Creditors’ Rights Lawyers

Although the bankruptcy code was designed to allow individuals and companies to restructure their debts, the code creates a lot of protections for creditors. Congress sought to make the bankruptcy process fair to both debtors and their creditors.

However, creditors in bankruptcy court who are passive and unrepresented tend to do poorly. A creditor must assert its rights in bankruptcy court to have the best chance of a positive outcome.

New Mexico Financial & Family Law is here to help you pursue that outcome and have your voice heard throughout the bankruptcy process. Get moving fast, while developing a smart strategy, when you reach out to us at (505) 503-1637 or contact us online to schedule a no-obligation case review.

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