Bankruptcy. The arrival of that notice stating a customer has filed for bankruptcy can evoke less-than-ideal responses: forwarding the notice to someone else who might know what to do with it (resulting in the notice ending up in a forever loop of being forwarded along); immediately writing off the account and cutting your losses; or, worst of all, ignoring the notice and proceeding as normal.

Such responses occur because most people haven’t been exposed to the nuances of bankruptcy law. This is a problem, as bankruptcy inevitably creeps into many business units, not just the bankruptcy or legal departments. Everyone who touches an account that is in bankruptcy should understand the special treatment it must receive and the potential consequences of noncompliance.

The top three bankruptcy pitfalls we see for our clients include:

  1. Not taking action soon enough (i.e., the deadline to file a proof of claim has already passed or the discharge has already been entered);
  2. Inadvertent, but prohibitively costly, violations of the automatic stay or discharge injunction; and
  3. Failure to establish and maintain business policies and procedures and account management systems that comply with bankruptcy requirements.

Clients can avoid these pitfalls by ensuring their organization has a working understanding of bankruptcy basics and how these requirements affect their business practices.

Introducing, Bradley’s Bankruptcy Basics

Are you in-house counsel at a financial services business that does not have a designated bankruptcy department? Are you in management at a bank or non-bank business that offers financing, leases, or merchant cash advances to customers who file for bankruptcy? Do you testify at or participate in court hearings, depositions, or mediations as a corporate representative in connection with bankruptcy cases or consumer protection and foreclosure lawsuits where customers have previously filed or will file for bankruptcy? Are you in the bankruptcy or litigation department of a financial services business and want a better understanding of bankruptcy concepts when communicating with outside counsel and making business decisions? If you answered “yes” to any of these questions, then Bradley’s Bankruptcy Basics is the resource for you.

Management, legal, and other business leaders can benefit from an understanding of bankruptcy law and its effects on their business operations. This will help ensure that the Bankruptcy Code and Bankruptcy Rules are not inadvertently violated. Additionally, a working understanding of bankruptcy concepts will help business leaders employ a cost-benefit analysis to continue to evaluate opportunities for collection, rather than simply writing off accounts that could otherwise have been partially collected. Further, a basic bankruptcy understanding will provide business leaders with the foresight to timely retain outside bankruptcy counsel when needed.

Bradley’s Bankruptcy Basics is a robust, multimedia series of to-the-point blog posts about common bankruptcy concepts and visual aids to be used as quick-reference guides. Over the course of the next several months, we will publish these blog posts, visual aids, and other multimedia content.

You’ve Received a Notice of Bankruptcy. Now What?

Bankruptcy cases move much more quickly than typical lawsuits. It is wise to begin reviewing bankruptcy filings and information about the account in bankruptcy on day one. This is especially true for chapter 11 bankruptcy cases in which so-called first day motions can drastically impact creditors’ rights. Use this resource from Bradley’s Bankruptcy Basics blog series to help you navigate your accounts through the initial steps.

Check the Dates. The notice of bankruptcy will include several important dates, including the date of the section 341 meeting of creditors, the deadline to object to a debtor’s discharge under section 727 or dischargeability under section 523, and the deadline to file a proof of claim. More information about each of those events will be included in forthcoming Bankruptcy Basics blog posts. Once you receive the notice of bankruptcy, it is important to calendar those deadlines to ensure they are not missed.

Flag the Customer’s Account and Halt All Collection Activity. Most importantly, once you receive a notice of bankruptcy or any other indication that a customer has filed for bankruptcy, you should flag the customer’s account and immediately halt all collection activity. This is vital to avoid a possible violation of the automatic stay.

    • If your business has a specific bankruptcy department, the account should be escalated according to your business’s policies and procedures.
    • Any scheduled repossession or foreclosure sale should be immediately canceled.
    • If you already have the customer’s collateral in your possession, you should cancel any scheduled auctions or sales until it is confirmed that the collateral is not part of the customer’s bankruptcy estate.
    • Additionally, the account should be flagged such that all communications go through the customer’s bankruptcy attorney, if he has one, rather than directly to the customer himself.
    • Any debt collection activity, such as sending default or intent to accelerate letters or prosecuting foreclosure suits, should cease immediately.
    • It is also wise to halt all collection activity as to related parties, such as non-filing spouses or guarantors, until it is confirmed that the automatic stay or co-debtor stay does not apply to them.

Review the Account. You should next conduct a review of the account.

    • Is the account current?
    • If not, what are the arrears?
    • Does the account have one or more loans?
    • Is there a lease, rather than a loan, on this account?
    • Where is the collateral right now?
    • Are any foreclosures or sales scheduled as to the collateral?
    • Is there any pending litigation on the account?

Answering these questions and following along with the upcoming installments of Bradley’s Bankruptcy Basics will help you avoid exposure for stay and discharge injunction violations and strategize your next steps.

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Photo of Elizabeth R. Brusa Elizabeth R. Brusa

Elizabeth Brusa is an associate in the Banking and Financial Services Practice Group focusing on small dollar lending, bankruptcy, and privacy, security and innovation. She is a Certified Information Privacy Professional for the U.S. Private-Sector (CIPP/US). Elizabeth counsels financial services clients on matters…

Elizabeth Brusa is an associate in the Banking and Financial Services Practice Group focusing on small dollar lending, bankruptcy, and privacy, security and innovation. She is a Certified Information Privacy Professional for the U.S. Private-Sector (CIPP/US). Elizabeth counsels financial services clients on matters related to bankruptcy proceedings, bankruptcy fraud and abuse, and Chapter 11 filings.

Photo of Alexandra Dugan Alexandra Dugan

Alex Dugan regularly represents financial services and mortgage company clients with compliance matters, including risk management and remediation, state investigations, regulatory compliance, and operational implementation of legal guidelines. Alex’s practice focuses on the bankruptcy compliance and regulatory concerns that her clients face. She…

Alex Dugan regularly represents financial services and mortgage company clients with compliance matters, including risk management and remediation, state investigations, regulatory compliance, and operational implementation of legal guidelines. Alex’s practice focuses on the bankruptcy compliance and regulatory concerns that her clients face. She is also a member of the firm’s Auto Finance and Payment Systems industry teams.

Photo of Christy W. Hancock Christy W. Hancock

Christy Hancock’s practice is dedicated to financial services regulatory compliance and litigation. Her work with mortgage servicing and financial institution clients has given her a broad base of knowledge regarding laws affecting the mortgage servicing business, including bankruptcy and foreclosure best practices, payment…

Christy Hancock’s practice is dedicated to financial services regulatory compliance and litigation. Her work with mortgage servicing and financial institution clients has given her a broad base of knowledge regarding laws affecting the mortgage servicing business, including bankruptcy and foreclosure best practices, payment application, correspondence requirements, allowable fees, loan modifications, escrow requirements, and property preservation. In recent years, the majority of her practice has focused on advising large financial institutions on bankruptcy-related regulatory matters and large-scale remediation projects.

Photo of Christopher L. Hawkins Christopher L. Hawkins

Chris Hawkins represents clients in a wide variety of bankruptcy and insolvency-related matters across the country. He represents debtors and creditors in out-of-court business restructurings and Chapter 11 bankruptcy cases. Chris represents creditors and financial institutions in bankruptcy-related litigation. In recent years, he…

Chris Hawkins represents clients in a wide variety of bankruptcy and insolvency-related matters across the country. He represents debtors and creditors in out-of-court business restructurings and Chapter 11 bankruptcy cases. Chris represents creditors and financial institutions in bankruptcy-related litigation. In recent years, he has devoted the majority of his practice to advising large financial institutions on bankruptcy compliance and bankruptcy-related regulatory matters.

Photo of Anna-Bryce Hobson Anna-Bryce Hobson

Anna-Bryce Hobson is an associate in the Construction Practice Group. She represents general contractors and subcontractors engaged in a variety of construction projects. Her primary focus is on public and private commercial construction disputes, whether they be in the form of lien actions…

Anna-Bryce Hobson is an associate in the Construction Practice Group. She represents general contractors and subcontractors engaged in a variety of construction projects. Her primary focus is on public and private commercial construction disputes, whether they be in the form of lien actions, delay claims, general breach of contract disputes, or other construction-related claims. Anna-Bryce also assists clients in drafting and negotiating their construction contracts.

Photo of Erin Malone-Smolla Erin Malone-Smolla

Erin Malone-Smolla joined the firm as an associate in the Litigation and Bankruptcy Practice Groups.

Erin graduated from Duke University School of Law, where she was managing editor of the Duke Journal of Constitutional Law and Public Policy. She also earned a…

Erin Malone-Smolla joined the firm as an associate in the Litigation and Bankruptcy Practice Groups.

Erin graduated from Duke University School of Law, where she was managing editor of the Duke Journal of Constitutional Law and Public Policy. She also earned a Master of Education degree from Lipscomb University and a B.A. in Political Science from Duke University.

Photo of Lauren G. Raines Lauren G. Raines

Lauren Raines is a member of the Banking and Financial Services Practice Group and the Real Estate Practice Group. Lauren divides her time between transactional and litigation matters and regularly handles both commercial lending transactions and financial services litigation. This hybrid practice has…

Lauren Raines is a member of the Banking and Financial Services Practice Group and the Real Estate Practice Group. Lauren divides her time between transactional and litigation matters and regularly handles both commercial lending transactions and financial services litigation. This hybrid practice has allowed Lauren to better serve her transactional clients by advising them on the potential areas of conflict that could arise later in litigation, and to effectively advocate for her litigation clients due to her broad understanding of real estate principles.

Lauren has successfully handled countless contested commercial and consumer mortgage foreclosure trials for banks and mortgage servicers across the state of Florida. Lauren also has experience handling lender liability claims, usury actions, lien priority claims, fraudulent transfer claims, and violations of federal and Florida consumer protection statutes. Lauren also regularly represents merchant cash advance companies in enforcement actions, bankruptcy litigation and defending against usury, RICO, preference and lien avoidance claims.

Photo of Hirshel M. Hall Hirshel M. Hall

Hirshel Hall is an associate in Bradley’s Bankruptcy and Creditors’ Rights Practice Group.

Hirshel has a J.D. from the University of Alabama School of Law, where he was the lead editor for The Journal of the Legal Profession and a member of the…

Hirshel Hall is an associate in Bradley’s Bankruptcy and Creditors’ Rights Practice Group.

Hirshel has a J.D. from the University of Alabama School of Law, where he was the lead editor for The Journal of the Legal Profession and a member of the Duberstein Bankruptcy Moot Court Team and the Bench and Bar Legal Honor Society. During law school, he served as an extern for the Hon. Jennifer H. Henderson of the United States Bankruptcy Court for the Northern District of Alabama. He also received the Judge C. Michael Stilson Bankruptcy Award for best paper in Bankruptcy (Fall 2018) and the Bankruptcy Commercial Law Section Award (Spring 2020).