Working With Bankruptcy Counsel on Creditor Collection Matters

We don’t act as bankruptcy counsel. Bankruptcy is its own specialty, with its own procedural rules, court culture, and substantive law, and we respect that line. When a debtor in one of our collection matters files bankruptcy, we coordinate with the client’s bankruptcy counsel. If the client doesn’t have bankruptcy counsel, we recommend someone and support the bankruptcy work to the extent it touches the underlying collection.

This page explains how we work with bankruptcy counsel and where state-court collection and bankruptcy proceedings actually meet.

The Division of Labor

When a matter is in active state-court collection and the debtor files bankruptcy, the work splits as follows.

Bankruptcy counsel handles:

• The proof of claim (with our documentation support)
• Adversary proceedings on non-dischargeability under 11 U.S.C. § 523
• Adversary proceedings on denial of discharge under § 727 (rare, but sometimes appropriate)
• Stay relief motions where the underlying collection matter justifies them
• Plan confirmation contests in Chapter 11 and 13 matters
• Reaffirmation issues in Chapter 7 matters
• Appearances at meetings of creditors and bankruptcy hearings
• All other proceedings within the bankruptcy court

We continue:

• State-court collection against non-bankrupt parties (guarantors, co-obligors, related entities)
• Preservation of judgment liens and other state-law remedies
• Calculation and tracking of the underlying claim through the bankruptcy
• Strategic analysis of the matter’s posture before, during, and after bankruptcy
• Coordination with bankruptcy counsel on the substantive issues that touch the state-court matter

The two streams are complementary. Bankruptcy counsel runs the bankruptcy; we run the collection.

The Touchpoints That Matter

A handful of issues sit right at the intersection of state-court collection and bankruptcy, and these are the ones that reward close coordination.

Proof of claim documentation

The proof of claim depends on documentation we usually already hold: the underlying note, the security agreement, the judgment, the payment history, the balance calculation with interest and costs. We hand that documentation to bankruptcy counsel for the filing, properly authenticated and supported.

If the underlying claim is already reduced to judgment, the judgment supports the proof of claim directly. If it isn’t, the proof of claim establishes the amount from the underlying contract or other claim documentation.

Non-dischargeability under § 523

Non-dischargeability claims under § 523(a)(2), (4), and (6), which are the most common in commercial cases, have to be raised by adversary proceeding within 60 days after the first date set for the § 341 meeting of creditors. That deadline is short and strictly enforced.

Our role here:

• Determining whether the underlying claim has facts that support non-dischargeability (fraud, false pretenses, fiduciary defalcation, willful and malicious injury)
• Providing the documentary record from the state-court matter that supports the theory
• Coordinating with bankruptcy counsel on the adversary proceeding
• Where the state-court judgment already rests on facts that support non-dischargeability, identifying collateral-estoppel arguments that let the bankruptcy court use those findings without relitigating them

When non-dischargeability is supported and the recovery justifies the cost, we and bankruptcy counsel coordinate to file the adversary proceeding inside the deadline. When it isn’t supported, or the recovery doesn’t justify the cost, we agree to skip the adversary proceeding and rely on the proof of claim alone. We’ll tell the client plainly which situation they’re in.

Stay relief

In some matters, relief from the automatic stay under § 362 makes sense. It can let state-court litigation against the bankrupt debtor continue (usually where there are co-obligors or other reasons the bankruptcy court can’t fully resolve the matter), allow enforcement against specific property (usually where the lender is fully secured and the debtor has no equity), or open up other targeted action.

We spot the stay-relief opportunities and work with bankruptcy counsel on the motion, supplying the state-court record that supports the grounds.

Judgment lien preservation

Judgment liens recorded pre-petition can survive the discharge in some circumstances. How the discharge and the lien interact is governed by §§ 506, 522(f), and 524. We track judgment liens and coordinate with bankruptcy counsel both on lien-avoidance motions the debtor files and on the responses that preserve the lien where we can.

The Texas homestead exemption is a frequent source of § 522(f) lien-avoidance motions in Texas bankruptcies. When one comes in, we look at three things: whether the homestead claim is actually well-founded (sometimes the claimed homestead status is contestable), whether the lien really impairs the exemption (sometimes the equity is below the exemption amount and the lien impairs nothing), and whether partial preservation is achievable (where some lien value attaches to non-homestead portions of the property or to non-exempt equity).

Continued enforcement against non-bankrupt parties

The automatic stay generally protects only the bankrupt debtor. Co-obligors, guarantors, and related entities usually aren’t covered. We keep state-court enforcement running against those parties throughout the bankruptcy, checking with bankruptcy counsel only to confirm that no protective order reaches a specific non-debtor.

In Chapter 13 matters, the co-debtor stay under § 1301 protects certain non-debtor co-obligors on consumer debts. We evaluate whether it applies and adjust enforcement accordingly.

Post-bankruptcy enforcement

When the bankruptcy ends, we take stock of what’s left:

• If the underlying debt was discharged: collection against the bankrupt debtor personally is barred, surviving liens may still be enforceable, and collection against non-bankrupt parties continues
• If non-dischargeability was established: the underlying judgment (or the portion adjudicated non-dischargeable) is enforceable against the debtor personally
• If the case was dismissed: the parties return to their pre-bankruptcy positions and full state-court enforcement resumes
• If a Chapter 11 or 13 plan was confirmed and is being performed: the plan governs

We then resume active enforcement at whatever level fits.

When the Client Doesn’t Have Bankruptcy Counsel

Some clients come to us with a bankruptcy notice in hand and no bankruptcy counsel lined up. We don’t take on the bankruptcy ourselves, but we can recommend counsel from a working list of firms we’ve worked alongside before. From there, we coordinate as described above.

Our recommendations come down to fit: the type of bankruptcy, the size of the matter, the geography, and the specific issues likely to come up. We have no referral-fee arrangement with any bankruptcy firm. The recommendation is based on fit, nothing else.

When Bankruptcy Hits, Coordinate Quickly

Bankruptcy deadlines move fast. The 60-day non-dischargeability window after the first § 341 meeting is short, stay-relief openings can close, and a lien-avoidance motion can get ahead of your judgment-lien preservation if you’re not watching for it.

If your matter has gone into bankruptcy, or you think it’s about to, contact the firm. We’ll coordinate with your bankruptcy counsel on the touchpoints that matter and keep active collection running against non-bankrupt parties.

Contact us to get started or call 214-368-4686.

Related Pages

• When the Debtor Files Bankruptcy After Judgment
• For Lenders and Financial Institutions
• Promissory Note and Guaranty Enforcement
• I Already Have a Judgment
• Defeating Guarantor Defenses
• Texas Collections Law FAQs