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Advantages of bankruptcy for the creditor

 

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In general, bankruptcy is seen as a threat to the secured and unsecured lender or creditor. Yet bankruptcy can result in an advantage to the secured creditor. One of the principal objectives of the bankruptcy laws is to achieve equality of treatment of similar creditors and to avoid the dismemberment of the debtor. Unless the debt is fully secured and can be liquidated a dismembered creditor is of little value to a secured creditor.


1) Incentive to Pay Secured Creditors


Outside of bankruptcy, the debtor may be inclined to pay unsecured judgment creditors to prevent the creditors from levying on the debtor's property and selling the property through execution. In bankruptcy, judgment creditors are stayed from further collection activity. In bankruptcy, instead of paying the judgment creditor, the debtor may choose to pay the secured creditor "adequate protection" to avoid lifting of the stay against foreclosure. In bankruptcy, the debtor is protected against general creditor's attempts at wage garnishment, execution sales, replevin, discontinuance of utilities, or discrimination based on the filing of the bankruptcy. Moreover, the debtor can reject burdensome contracts, avoid unperfected liens made to other creditors, and recoup payments made to other creditors on the eve of bankruptcy.


2) Control Over Debtor in Bankruptcy


Sometimes it is necessary for the creditor to take away from the debtor the control of the debtor's business or property. Outside of bankruptcy and under the proper circumstances, the creditor may have a state court receiver appointed. However, some courts are very reluctant to appoint a receiver, and the creditor may have to post a bond. Rather than having a receiver appointed outside bankruptcy there can be advantages in having a trustee in bankruptcy appointed to operate the creditor's business. In bankruptcy it is the trustee that has to post the bond.

Outside of bankruptcy the debtor has very little restriction on dealing with the assets. The debtor can sell off assets and choose to pay one creditor over another. This right is subject to the law of fraudulent conveyances but this may not be a very effective remedy. In bankruptcy the debtor in possession is controlled by the bankruptcy court and sales outside the ordinary course of business cannot be made without notice to the creditors and opportunity to be heard. A debtor guilty of fraudulent conduct in a bankruptcy case is subject to fine and imprisonment.


3) Information on Debtor's Affairs


The secured creditor can obtain information on the debtor's affairs more readily in bankruptcy than outside bankruptcy. In bankruptcy the debtor has to submit to examination by creditors. In general, outside of bankruptcy the creditor cannot require an examination for assets until there has been a judgment. In bankruptcy the debtor's financial information must be submitted under oath at the commencement of the case.


The legislative history of the Bankruptcy Code would indicate that this was the general intent:

Secured creditors should not be deprived of the benefit of their bargain. There may be situations in bankruptcy where giving the secured creditor an absolute right to his bargain may be impossible or seriously detrimental to the bankruptcy laws. Thus, [Bankruptcy Code section 361] recognizes the availability of alternative means of protecting a secured creditor's interest. Though the creditor might not receive his bargain in kind, the purpose of the section is to insure that the secured creditor receives in value essentially what he bargained for. H.R. Rep. No. 595, 95th Cong., 1st Sess. 339 (1977).

However, in United States Sav. Ass'n v. Timbers of Inwood Forest Assocs., the Supreme Court acknowledged that the delay in foreclosing resulting from the automatic stay caused the secured creditors to bear some of the cost of a reorganization. 484 U.S. 365, 379, 108 S. Ct. 626, 634 (1988).


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