As always, before reading this post please review my disclaimer by clicking on the link above or by clicking on this link. As always, any legal principles discussed apply only to the Commonwealth of Virginia.
Introduction
One day, in the course of your business dealings, you sign a contract with someone. They breach that contract, you sue them and you win a substantial judgment. You've ready my blog post about how to actually collect on a judgment, and filed to garnish the other party's wages. Then, all of the sudden, you receive a notice that the other party has filed for bankruptcy. So, your questions become, what must you do now, and what does the bankruptcy mean for your judgment?
Before I begin this post, I would point out I am not a bankruptcy attorney. As a result, this post will not be getting into the details of every rule and exception that applies in bankruptcy. Nonetheless, there are some rules that every civil litigation attorney must know about bankruptcy, and every person involved in civil litigation should know. I will be covering those today.
The Automatic Stay
The first, and probably most important, thing that you need to do when you get that bankruptcy filing notice is ensure that you are honoring what is known as the "automatic stay." When a person files for bankruptcy, no person is allowed to take any legal action against that person, or any action to collect on a debt against that person (except within the context of the bankruptcy case itself). This is called the "automatic stay" because anything that is already in progress gets stayed (delayed indefinitely).
Now, this is very important to understand because the penalties for violating the automatic stay can be serious. You, yourself, can be fined a substantial amount of money if you knowingly violate the automatic stay. Now, of course, the key word there is "knowingly." You cannot violate the automatic stay until you know about it, so if the bankrupt person fails to ever send you notice, then that's on them. Bankruptcies are rarely filed pro se, however, and any decent bankruptcy attorney is going to make sure every relevant person is notified.
Once you are notified, it is on you to make sure you are not violating the automatic stay, not on the court, not on the bankrupt individual. If you have an ongoing lawsuit against a person, you need to inform the court about the bankruptcy immediately, where the court will then halt the proceedings. In the garnishment example I listed above, that is a legal action to collect on a debt, so you must immediately file with the court to dismiss the garnishment proceedings.
Now, as a practical matter, while I used the word "knowingly," the word actually used in the Bankruptcy Code for violation of the automatic stay is "willingly." This is a bit of an important distinction because this means you can still be ok if you are knowingly violating the automatic stay but that violation is not willful. Say you get the notice while you are horribly ill and can't make it to the courthouse for two weeks to let them know - then your violation of the automatic stay is not willful, and you should be ok. Nonetheless, it is always in your best interest to honor the automatic stay as fast as possible.
Next Steps
Your next step is to monitor the bankruptcy case. The easiest way to do this is to go to http://www.pacer.gov and sign up to get an account. Once you do, you can follow all the filings in the relevant bankruptcy case. This is important, because if the case is dismissed without a "discharge," then the case has no effect on your judgment and you can get right back to your garnishment as soon as the case ends. It will also help you make sure that the debt to you is listed properly (for example, if you have recorded your judgment in the judgment lien docket and the debtor owns real property in the county where you recorded, your judgment should be listed as a secured debt, not an unsecured debt). If you do notice an error with how your judgment is treated, you should contact the debtor's attorney and the bankruptcy trustee to let them know. Chances are the debtor's attorney will amend their "schedules" to get it right. If they don't, however, you may wish to consult with a bankruptcy attorney about challenging the bankruptcy filing.
Should I Attend the Meeting of Creditors?
One thing you will see in your bankruptcy notice is information about a "meeting of creditors." This is a meeting at the bankruptcy trustee's office where creditors can go, if they wish, and ask the debtor questions to try to find out if the debtor has any assets that were not properly disclosed. Unless you know the debtor pretty well and have an idea of questions to ask, attending the meeting of creditors is generally not worth it. For me, in all my time handling collections matters, I've attended a meeting of creditors once.
Should I Object to the Discharge?
Now, one of the toughest decisions to make is whether to let the debt go to discharge, or to fight the discharge of your debt. The fact is, for judgments, most judgments can be and will be discharged, so there is usually little value in fighting your discharge unless you believe you fit into one of the few nondischargeable categories. These include things like your judgment being for unpaid student loans, or a debt accumulated due to fraud of false representation. In the contract example I started with, unless you can prove that the person never intended to pay you when he signed the contract, chances are your debt is fully dischargeable. Nonetheless, this is again an area where you may wish to consult with a bankruptcy attorney before deciding for sure.
Effect of a Discharge on my Judgment
So, let's say you don't object, and the case goes as most individual bankruptcies go - there is no non-exempt property to distribute, and the creditors get nothing, while all debts are discharged. When a debt is discharged, that means it is no longer considered owed, and you cannot attempt to collect it. This is true for judgments regardless of whether or not the judgment was secured by a lien. Once the judgment is discharged, it is (almost, see below) completely uncollectable.
What About the Lien?
So, let's say you're one of those rare judgment creditors who happened to have a judgment debtor who owned real property and you recorded your judgment prior to the bankruptcy filing. That gives you a lien on the debtor's property. Liens are not automatically discharged in bankruptcy, and unless avoided (I will get to that in a moment), your lien will survive the bankruptcy. What that means is, while you cannot take action to collect on your judgment anymore, the lien remains, so when, eventually, the debtor sells his property, he will have to satisfy your lien.
Now, the exception to this rule is if your lien is "avoided" in bankruptcy. Bankruptcy allows a judgment debtor to avoid judicial liens in certain circumstances. Unfortunately, those circumstances are almost always applicable when someone is bankrupt (for example, one of the circumstances is basically having minimal equity in the real property). That being said, the debtor must actively move to avoid the lien, so failing to take that active step allows the lien to remain. Further, there may be grounds for you to oppose the avoidance of your lien, so if such a motion is filed, you should really consult with a bankruptcy attorney.
Conclusion
As an attorney who practices collections law, bankruptcies are generally the bane of my existence. I would estimate anywhere between 30-50% of my collections cases in any given year end with the debtor declaring bankruptcy and my client never seeing a dime as a result. Nonetheless, options do exist to help protect you. If you are involved in a collection and fear a bankruptcy may be coming, please feel free to call (703)281-0134 or e-mail me at SLeven@thebaldwinlawfirm.com to set an initial consultation to see if this a good matter for us to represent you. Our initial consultations are free for up to half an hour!
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