Gallet Dreyer & Berkey, LLP | Misconceptions About Bankruptcy
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Misconceptions About Bankruptcy

May 2019 | By: Mark B. Brenner, Esq. | GDB 2019 Spring Newsletter
The focus of my practice is real estate and bankruptcy law. Completing a real estate purchase, sale or lease requires cooperation. If the parties can’t cooperate, there is no deal. Bankruptcy imposes similar clarity by rewarding full disclosure of required information and discouraging spendthrift behavior. Bankruptcy Judges are part of the federal court system that does not readily countenance misbehavior by unscrupulous lawyers and litigants, who may evade punishment for bad conduct elsewhere. Though people have a basic understanding about real estate, bankruptcy requires study. As a result, what most people know about it, including lawyers who don’t practice it, is heard on the street.  Examples follow.
1.     Bankruptcy kills debts. Some people mistakenly believe that the mere act of filing for bankruptcy discharges obligations. It does not. Bankruptcy is not applied to debt like insecticide is sprayed on bugs. It is true that an automatic stay goes into effect upon the filing of a bankruptcy case.   The automatic stay prevents most creditors from pursuing claims against the debtor (excluding creditors who seek to enforce domestic support obligations, most tax obligations, and criminal fines and penalties) unless and until one or more creditors seek a court order “modifying the stay” to permit continued collection efforts.   However, the underlying debts remain very much alive until the court issues a final decree and order of discharge that may take months and years to issue, assuming one ever does.  The party who files for bankruptcy (“debtor”) is required to complete a challenging set of statements and schedules in good faith that fully discloses assets, liabilities, income and expenses, so that creditors and other interested parties, including chapter 7, chapter 11 or chapter 13 case trustees can review that information and determine whether there are bankruptcy estate assets worth administering, or reasons to seek dismissal or conversion of the debtor’s case, or to sustain an objection to discharge of obligations.  A debtor must work to obtain a discharge, and often continues to owe debt that is “non-dischargeable”.
2.         Bankruptcy kills the debtor’s future because a debtor will never obtain a good job or get to keep any assets.   In truth, bankruptcy is the first responsible economic decision many debtors have made in years.  Chapter 7 debtors whose credit cards have been frozen begin receiving credit card applications in the mail immediately after filing for bankruptcy.  The interest rate and service charges on these ‘subprime credit cards’ are high and often avoidable. But to a debtor who has received no offers of any kind, good or bad, for extensions of credit before filing for bankruptcy, are astonished to receive credit card offers within days after filing.  As for employment, the bankruptcy code makes it unlawful for an employer to discriminate against one who files for bankruptcy.  Finally, if debtors seek advice sooner rather than later, there are many “exempt assets” they can keep after filing for bankruptcy.  
3.         Anyone can file for bankruptcy on his own (“pro se”) because debtors have nothing to lose and don’t need a lawyer.   This rumor may help explain why a bankruptcy debtor’s expertise in financial planning is not universally recognized.  After experiencing so much misfortune, it is hard to imagine why a prospective debtor would make a choice about filing for bankruptcy without first seeking legal advice.    Indeed, filing “pro se” may be a correct strategy.  But a bankruptcy filed pro se or otherwise is not the right choice for everyone.  In some cases, filing for bankruptcy is a very bad move. 
Filing a business entity bankruptcy “pro se” can be especially damaging.  In fact, corporate and limited liability companies that file for bankruptcy must be represented by legal counsel.  A person who runs a corporate or limited liability company may think she is the company.  But she is not.  A recent pro-se filer of a corporate bankruptcy learned that lesson the hard way.  At the first hearing before the court after filing her company’s Chapter 11 case, the Judge converted the proceeding to chapter 7, and appointed a chapter 7 case trustee to take over the company, identify its assets, sell them off, and wind down its affairs.  The person who filed that company for bankruptcy “pro se” was out of a job.  Moreover, the chapter 7 case trustee was free to pursue claims against her to recover “fraudulent transfers” and “preferential transfers”, including money previously collected by that prior owner as “salary” that the trustee claimed was really an improper dividend paid to her as an investor before secured and general unsecured creditors of the company who should have been paid first. The lesson is plain.  Look before you leap.
4.         We can always file for bankruptcy.  A client who is a commercial landlord called me the day that the City Marshal was delivering possession of certain commercial premises to his company pursuant to a warrant of eviction.  The evicted tenant had just appeared at the store with a notice of commencement of a Chapter 11 case.   The City Marshal delivered possession to the landlord who changed the locks on the premises 3 hours before the date and time stamped on that bankruptcy notice.  The store was not an asset of the bankruptcy estate.   The former tenant was directed out of the premises.
If you or someone you know is considering filing for bankruptcy, or seeks to protect or recover assets including real estate interests from someone who may have filed, or may yet, Mark B. Brenner, a senior partner at this firm, is available for consultation.