Bankruptcy is one of the harsh realities that creditors have to deal with all too often when enforcing judgments. And make no mistake about it, the reality is harsh- the minute a debtor files a bankruptcy petition, you as the judgment creditor, instantly change positions. You go from the extremely advantageous position of holding an enforceable judgment which allows you to levy, garnish, and seize debtor property to your hearts content– to being unable to do anything*, and having your once proud and meaningful judgment teetering on the edge of complete extinction. **
Because of this drastic paradigm shift, and because bankruptcy is a whole different Court system with all its own procedures and rules, many creditors simply give up the minute they get a bankruptcy petition in the mail. This article, the first of four in a series of bankruptcy related articles, is meant to communicate to creditors some advance measures they can take to better their position in the event of a debtor BK. However, the overarching message of this article and the rest in the series is – Do not lose hope just because your debtor files for Bankruptcy! You still may be able to collect. In fact, while certainly the exception and not the rule, collection in bankruptcy can actually be easier than collection outside of bankruptcy (discussed later.)
Preparatory Measures
Before discussing Creditor’s Rights and Remedies in Bankruptcy, the first thing that a Creditor should do in a bankruptcy is be prepared for the bankruptcy before it comes. A few simple rules to remember here are the following:
(1) Every person or company, no matter how you perceive their finances, is capable of declaring bankruptcy, so prepare accordingly.
Many Creditors make the mistake of assuming that certain debtors will never go BK. Never assume this. Kodak went bankrupt. Suzuki went bankrupt. So did American Airlines. Your debtor can too. And probably will when you least expect it.
(2) Always remember: your judgment is not special in bankruptcy court, it is just a plain old debt. *** In terms of payment priority and the percentage of your debt you may recover out of a debtors liquidated assets in a BK, a hard fought, litigated judgment debt is treated no differently than a debt created by a simple outstanding invoice that was never sued on. Priority in bankruptcy is decided largely by liens. If a creditor has a lien on a debtor’s asset, if/when that asset sells, that creditor gets paid first, before any other creditors who do not have liens.
(3) So: get liens in place as soon as possible. Because it is liens which determine payment priority and therefore, judgment creditors should immediately take advantage of all available methods to record judicial liens. There are many types of liens, but the three most common (and most useful) are as follows:
a. Real Property Lien. To record a real property lien in the state of CA, a judgment creditor must obtain an abstract of judgment and record it in the County where the Debtor holds real property. This creates a lien for the judgment amount on the property, and the result is that no creditors without liens can get one single dime out of the sale of that property, until you are paid in full. (See Cal. Code of Civ. Proc. Section 697.310 et seq for further discussion)
b. Judgment Lien on Personal Property. To place a lien on certain kinds of personal property within the State, a Creditor must fill out a JL-1 Lien Form and record this form with the CA Secretary of State. This places a lien on certain types of personal property, such as equipment and accounts receivable. And again, in a bankruptcy scenario, if an asset with this type of creditor’s lien on it is liquidated, the creditor holding the lien must get paid in full before any non-lien holding creditors get paid.
c. Debtor’s Examination Notice Lien: A creditor may also serve a Debtor’s Examination notice on the Debtor under Cal. Code of Civ. Proc 708.110 et seq, and this service creates a lien on all personal property of the debtor, wherever situated (does not have to be in CA) and almost without limitation. This is an extremely powerful and sweeping lien, but it is only good for one year after it’s creation, unless an extension is granted by the Court.
To get these three liens in place should cost around $250.00 in fees altogether and require about five sheets of paper. And any one of these simple liens can and often does mean the difference between a creditor in bankruptcy recovering his/her claim in full, and recovering nothing at all.
Moral of the Story– Record the liens.
And come back soon to see the next article: Judgment Collection in Bankruptcy: Pursuing your debtor into bankruptcy court- initial considerations and first steps.
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