Jump to Navigation

Bankruptcy: Prejudgment Remedies for Creditors


Printer Friendly Page


Bankruptcy: Prejudgment Remedies for Creditors

Introduction

A bankruptcy proceeding is commenced with the filing of a petition by either the debtor or his creditors and is followed by a judgment from the bankruptcy court that the debtor is bankrupt. Once this judgment is entered, a creditor's options for enforcing collection become severely limited. Moreover, payment of debts in bankruptcy is carried out through a priority system, which may well exhaust funds before all debts are paid. For that reason it is wise for creditors with outstanding debt to develop a strategy early on. A bankruptcy attorney can help you explore and evaluate your options and come up with a strategy in order to optimize your chances of recovery. One possible tactic is the use of prejudgment remedies. Prejudgment remedies are ways for the creditor to preserve the value of their interest by preventing the debtor from transferring, encumbering, dissipating, or concealing assets.

Prejudgment Remedies Available to Creditors

The creditor's cause for concern lies in the possibility that a debtor will file for bankruptcy, pay off some priority debts with whatever assets he has, and discharge the rest. If a creditor is not one of the priority cases, there is a good chance his or her debt will never be repaid. The creditor's opportunity for augmenting his chances of recovery comes before the debtor has filed for bankruptcy and the bankruptcy court has entered a judgment that the debtor is bankrupt.

Once the debtor is declared bankrupt, treatment of creditors follows the structure outlined by the bankruptcy act. Secured creditors are paid first, followed by unsecured creditors. A secured debt is one that is bolstered by collateral, which can be seized by the creditor upon default. Liens can be consensual, such as a mortgage, or involuntary, such as a lien imposed by a court. Once a lien is in place, the creditor can use it as leverage to negotiate with the debtor, or can seize the property and sell it.

Secured creditors, however, are not with out risk. Generally speaking, priorities are established by a "first in time, first in right" approach. This means that those debts that are established first are paid first. There are steps creditors should take to determine their place in time, and thus their payment priority. An agreement to leverage a piece of real estate or personal property as collateral must first be reached in writing. Then, in a case where the collateral is a piece of real estate, the creditor will need to register the deed. In a case where personal property acts as collateral, sometimes called attachment, the creditor must "perfect" the lien. Perfecting is most often achieved through the filing of a financial statement, or by possession. Upon default, a secured creditor may seize secured property through foreclosure or self-help.

Foreclosure involves a judicial action resulting in a sheriff's auction of the property. The debtor usually has the right to redeem the property by paying the debt in full with in a certain amount of time. Self-help repossession is seizure of a property without court action. In this case, the creditor simply appears and repossesses the property. The only limitation placed on this method is that the creditor may not breach the peace in his attempt at repossession. This means that he may not break in or perform any other illegal act, threaten the debtor with violence, or defraud the debtor. In fact, generally, if the debtor asks the repossessor to go away, the repossessor must do so. However, if at a subsequent time there is no such resistance, the repossession may proceed. When self-help measures fail, the creditor can go to court and bring an action to recover either the actual property, or the value of the property.

The unsecured creditor has options as well. The first step, however, is an evaluation of the debtor's financial situation to determine whether or not to pursue efforts to collect the debt at all. If the debtor has property and that property is not called for by other creditors, there are some actions the unsecured creditor could take.

One is to obtain a lien against the debtor and thus secure the debt. This can be done either through the voluntary method of attachment discussed above, or through the involuntary judicial lien. To obtain a judicial lien, the creditor must first sue the debtor and obtain a judgment that the debtor owes a sum of money to the creditor. Based on that judgment, the creditor may then seek a lien on property from the court, and foreclose on the lien.

Other prejudgment remedies for creditor's include: garnishment, the means by which the creditor seizes intangible personal property such as a person's wages or bank account balances; temporary restraining orders and preliminary injunctions issued by the court to prevent the dissipation of the debtors assets until a judgment can be obtained by the lender; replevin, an action to recover the property; and detinue, an action to recover the goods or their value.

Legal limitations on these and other prejudgment remedies protect the debtor from an onslaught of creditors rushing to protect their investments. While federal law has increasingly regulated the relationship between debtor and creditor, most of the remedies available to creditors are still found under state law. Thus the availability of a particular remedy will vary depending on the approach toward the debtor/creditor relationship taken by a given state.

Conclusion

A creditor seeking to protect his or her interests should develop a strategy for dealing with default on a debt as early as possible. Options for pursuing collection become curtailed once a bankruptcy trustee takes over the administration of a debtor's estate. Some prejudgment remedies, such as liens, should be considered before even becoming a creditor. An experienced bankruptcy attorney evaluating prejudgment remedies in light of your particular circumstances can help to develop a plan to improve your position as a creditor.

© FindLaw. All rights reserved.


Cadden & Fuller LLP has prepared the information provided in this site for informational purposes only. Any and all information posted on this site should not be considered legal advice. Viewers should consult an attorney for individual legal advice prior to acting upon any information provided in this website. Viewers are advised that the information contained within this site may or may not reflect the most recent developments in the law. Transmission and or receipt of any information on this website is not provided or intended to create an attorney-client relationship.

Copyright © by Cadden & Fuller LLP. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.

office tower
error-file:TidyOut.log

Home|Firm Overview|Practice Areas|Attorneys|Articles|Office Location|Recruiting|
Resource Links|Contact Us

error-file:TidyOut.log

Privacy Policy | Business Development Solutions by FindLaw, a Thomson Reuters business.