How creditors in bankruptcy can lose out by “sleeping on their rights”

At recent bankruptcy conference I attended, we reviewed a lot of recent cases. These all reinforce something I have told many people over the years: when faced with a bankruptcy of someone who owes you money, delay and inaction can be a costly mistake.

Some examples: A mortgage creditor who failed to object to a modified Chapter 13 bankruptcy plan that gave the homeowners two years to sell their home and a similar period to sell their business equipment (also part of the bank’s collateral) lost the right to later seek permission to foreclose on the home through a motion for stay relief. It made no difference that before the modified plan was confirmed by the bankruptcy court, the debtors had agreed that the bank could have stay relief if they failed to meet certain payment obligations. The later approval of the modified plan controlled.

In another case, the bank had an Assignment of Rents on the debtor’s rental property that gave it the right, if the bank served notice of default, to collect the rents directly from the tenants. Although the debtors defaulted, the bank did nothing, and the debtors continued to collect the rent (while not paying the bank). The bankruptcy trustee stepped in to try to get the rents back. The court said no because the rents belonged to the bank IF they asked for them.

I had another case recently where a landlord who was owed rent by a tenant in Chapter 13 did nothing for the first few months when the tenant seemed to be resuming payment (but not paying the past due amounts which were supposed to be paid bakc under the Chapter 13 Plan). The deadline for the landlord to file a proof of claim passed without the landlord filing a claim. The debtor stopped paying rents. The landlord has probably forfeited its right to get paid anything on its back rents owed when the bankruptcy was filed.

There are many other examples I could provide. The takeaway for creditors is to start acting as soon as you learn of a bankruptcy filing, especially in Chapter 11 and Chapter 13 cases. When in doubt file a proof of claim and stay on top of what is happening. Pay attention to all notices and deadlines in them. Most importantly, creditors need to find out what the bankruptcy means for them and  develop a plan of action.

With over 30 years of experience representing creditors, trustees and debtors, we are able to help with timely and cost effective advice.


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