The old saying is you can’t squeeze blood out of a turnip, so hopefully we have learned about the bankruptcy potential before we’ve gone too far and spent too much time and effort on this. In some situations, the debtor might have money when we first sued them, but as the process drags on and they don’t pay right away, they might eventually just give up and file bankruptcy.
If we are just an unsecured creditor, we’re going to be treated just like all of the other unsecured creditors. If, however, you’re a secured creditor—like if we’ve been able to record a judgment lien—that elevates us above unsecured creditors, giving us a better chance of getting at least a percentage of our claim back if the debtor does have some assets that are being liquidated through the bankruptcy process.
Chapter 7 bankruptcies are the liquidations. They’re called no-asset bankruptcies because there are just no assets. It doesn’t matter if you’re secured or unsecured; you’re generally not going to get much of anything. If the debtor is a business that just needs time to reorganize, they might file a Chapter 11. If you’re a secured creditor in that case, it definitely puts you in a more favorable position than if you’re an unsecured creditor. To become a secured creditor, you usually need to secure a judgment and record a judgment lien.
If You’re Able To Collect On The Debt On Behalf Of Your Client But The Debtor Then Files Bankruptcy, Could They Try To Claw Back On That Payment?
This could happen if the debtor files within 90 days of a payment, though it’s rare. Let’s say we do a bank levy and collect everything. If the debtor files bankruptcy 80 days later, the trustee could come back to us and ask us to try to claw back that money. For that reason, when we do collect money under a bank levy, I won’t record a satisfaction of judgment until more than 90 days have passed if the whole judgment is satisfied or even partially satisfied. I don’t want to release my judgment and then find out that the trustee’s going to want some of the money back.
This situation is more common when debtors have just received payments, even before we got involved, and file for bankruptcy. They might get a letter from bankruptcy trustee saying, “We want all the payments that you got in the 90 days before the bankruptcy returned.” We handle those types of cases as well on behalf of our clients, and generally, we can settle those for much less than what the trustee is asking.
Is There Anything You Can Do As My Attorney If I Know Or Suspect The Debtor Is Disposing Of Assets While We’re Trying To Collect On What They Owe Me?
In California, there’s avoidable transfer law, which allows the court to basically claw back by setting aside transfers of money or property that had occurred that we can show were used to frustrate our efforts to collect. For example, if you own a piece of real property, a house, and you deed it to your uncle for nothing, that’s avoidable transfer if the purpose of it was to make it more difficult for us to collect. Fortunately, there’s always a paper trail when things like that happen. It’s just, if we have a $10,000 judgment, how much time are we really going to spend on following that paper trail? It’s just a business decision. Now, if you have a $100,000 judgment or more, then it probably makes sense to dig in and see what happened. If we went from someone who appeared to have assets to someone who appears broke, we need to figure out how that occurred.
Have You Ever Seen A Debtor Close Up Shop And Disappear? What Can Be Done In That Situation?
If we don’t have a personal guarantee and it’s just a smaller business that’s folded, there’s not a lot you can do. We’ve seen an increase in instances during COVID as small companies, especially those in the hospitality or restaurant industry, have folded. I mean, if the company has gone out of business, doesn’t have any assets, didn’t provide a personal guarantee, gives no evidence we can add an individual on an alter ego basis, and doesn’t reveal any voidable transfers, that debt is just uncollectible. It’s not super common, but it happens; it’s just one of the things we deal with.
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