A Glossary Of Creditor’s Claims

Getting pulled into a bankruptcy case because a business or client you have been working with is in financial distress is not fun. Even if their case will not threaten your business, it is challenging to know how to best navigate the situation. 

The first step toward protecting your interests is often hiring an experienced bankruptcy attorney to advise you. Hanson & Payne has filled this role for numerous creditors in the Milwaukee area. 

One of the many things we do to assist our clients is explain to them their role in the case. Below is a brief overview of some different types of debt a creditor may hold, and an explanation of how the debts they are owed may be treated by the bankruptcy court. 

Lien – The right to take and hold or sell the property of a debtor as security or payment for a debt.

Secured Debt – Debt backed by a mortgage, pledge of collateral, or other lien. The creditor typically has the right to take possession of the property securing the debt if the debtor defaults. Examples of this type of debt include home mortgages, auto loans, and tax liens.

Secured Creditor – A creditor who holds secured debt. 

Undersecured Claim – A debt secured by property that is worth less than the amount owed. 

Unsecured Claim – When credit is extended solely upon the creditor’s assessment of the debtor’s future ability to pay, and there is no special assurance of payment, such as a mortgage or lien. Examples of this type of debt include credit card debt, medical bills, and personal loans. 

Priority – When there is not enough money to pay off all of a debtor’s unsecured claims, the debt will be ranked by priority. Higher priority debts will be paid off first. Low priority debts may not be paid off at all. Low priority debts may be discharged by the bankruptcy court. High-priority debts include alimony and child support, certain tax debt, and debts related to personal injury lawsuits. Low priority debts include credit card debt and medical debt. 

Preference or Preferential Debt Payment – Creditors and other businesses that have already been paid, and may not be aware that a business they work/ed with is in financial distress, can be pulled into a bankruptcy if a payment was made to them within 90 days before the debtor filed for bankruptcy. Bankruptcy law does not want for some creditors to get special preferential treatment so they may attempt to claw this money back to more fairly redistribute it among creditors. Thankfully, there are defenses a creditor/fellow business can deploy if the bankruptcy court attempts to claw back payments. 

While we hope this blog post is a helpful resource to creditors in the Milwaukee area, it is important to remember that true legal advice is not something you can get on the internet. If you have questions about bankruptcy, please contact our office to set up a meeting with a member of our team

Buying A Home Post-Bankruptcy Is Not An Easy Task

Wisconsin’s real estate market is red hot. The median price of a home in the Milwaukee region shot up to over $268,000 over the summer. It has since fallen off a little bit, but prices remain at historic highs. This is good news for sellers, but not so good for buyers. Many would-be buyers have struggled to find homes they can afford. 

Milwaukee area home buyers are also facing rising mortgage rates. After dropping to historic lows after the 2008 recession, and remaining low because of the pandemic, they are beginning to creep up. 

According to the Wisconsin REALTORS Association (WRA), “The increase in the mortgage rate combined with rising home prices pushed affordability down. The Wisconsin Housing Affordability index fell 18.1% in October 2021 compared to October 2020.”

This does not sound good, but they went on to note that, “Still, a qualified buyer with a median family income, a healthy 20 percent down payment and with the remaining balance financed with a 30-year fixed-rate mortgage can afford to buy 188% of the median-priced home in the state in October. This compares favorably to the national index for September with the latest monthly figures available, which shows that the typical U.S. buyer can only purchase 151% of the median-priced U.S. home.” 

The problem is not everyone is the sort of “qualified buyer” they describe. Most mortgage lenders won’t work with someone who has filed for bankruptcy for a period of time ranging from one year to four years after the bankruptcy case was closed. The length of the waiting period depends on the type of bankruptcy filed and the type of mortgage sought. 

Chapter 7 Bankruptcies 

Filing for bankruptcy under Chapter 7 involves liquidating a debtor’s assets and using the proceeds to pay off creditors. Most remaining debts are then discharged, or forgiven. 

Conventional lenders will typically not lend to someone who filed for Chapter 7 bankruptcy for four years. The waiting period can drop if the debtor can show their financial troubles were due to extenuating circumstances, and they are now in a better financial situation. 

Some borrowers may prefer to apply for a FHA or VA mortgage. The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development (HUD). The agency requires borrowers to wait two years after a Chapter 7 bankruptcy before getting an FHA mortgage. The Department of Veterans Affairs (VA) also requires Chapter 7 filers to wait two years before receiving a VA mortgage. Both agencies may shorten their waiting period if the borrower can prove extenuating circumstances. 

Chapter 13 Bankruptcies

A Chapter 13 bankruptcy is a court-supervised repayment plan. Borrowers don’t typically liquidate their assets to pay off debts, instead, they work to repay the debts they owe a little at a time. At the end of the years-long court-supervised repayment period, some remaining debts may be discharged.

A would-be home buyer who wants a conventional mortgage will need to wait two years after the close of their Chapter 13 case to apply for a mortgage. However, it may take longer than that for someone who has filed for bankruptcy to build up their credit score enough that a conventional loan is accessible to them. 

If an FHA or VA mortgage is an option, a Chapter 13 filer can get one 12 months after their case is filed if the bankruptcy court okays it. 

Past The Waiting Period, But Still Waiting On A Mortgage

Even after the required waiting period has passed, people who have filed for bankruptcy are often offered higher rates and lower borrowing limits than other people. This is one of the reasons why bankruptcy is not something you should rush into. There are definite downsides to it. 

If you are in financial distress, the experienced Milwaukee-area bankruptcy attorneys at Hanson & Payne can counsel you on your options, and work with you to find a path forward. Please contact us today to schedule an initial meeting with our team. 

Bill Would Limit Venue Shopping In Bankruptcy Cases

Most lawsuits have to be filed in the location where the action leading up to the lawsuit occurred. This is currently not true for bankruptcy cases. In fact, Bon-Ton, Briggs & Stratton, and Shopko all filed for bankruptcy outside the state of Wisconsin despite their strong ties to our state. A bill that is pending in Congress would change the bankruptcy law to prevent large companies from “venue shopping” when they need to file for bankruptcy. As bankruptcy attorneys who do a fair amount of commercial bankruptcy work, and regularly represent creditors in bankruptcy cases, the Hanson & Payne team is keeping a close eye on this legislation. 

Current Law Is Flexible 

The venue or location of a corporate bankruptcy case is currently governed by 28 U.S.C. § 1408, which allows companies to file a bankruptcy petition where they are incorporated, or where one of their affiliates is located. Large corporations that do business all over the country often choose to file for bankruptcy in Delaware, New York, or Texas even if they only do a little bit of business there because there is a perception that the bankruptcy judges in those venues are better at handling large, complex cases than the bankruptcy judges in other courts. 

As bankruptcy practitioners in Milwaukee, who regularly appear in the United States Bankruptcy Court for the Eastern District of Wisconsin, the Hanson & Payne team is confident that our judges are just as capable as those in other jurisdictions. We are therefore keeping an eye on a piece of legislation that would limit bankruptcy venue shopping, and potentially mean more complex commercial bankruptcy cases are heard in our local court. 

Bankruptcy Venue Reform Act of 2021

Senators Elizabeth Warren, a Democrat from Massachusetts, and John Cornyn, a Texas Republican, have introduced a bill that would curtail bankruptcy venue shopping. If the legislation passes, it would:

  • Require individual debtors to file for bankruptcy in the district where their domicile, residence, or principal assets in the United States are located;
  • Require corporate debtors to file for bankruptcy in the district where their principal assets or principal place of business in the United States are located;
  • Corporate debtors would no longer be permitted to file simply on the basis of their state of incorporation.
  • Stop debtors from filing for bankruptcy in another district simply because an affiliate of the debtor has filed there; and
  • Require bankruptcy judges to transfer or dismiss cases filed in the wrong district.

The bill includes a finding statement noting that these changes are desirable because current law “prevents small businesses, employees, retirees, creditors, and other important stakeholders from fully participating in bankruptcy cases that have tremendous impacts on their lives, communities, and local economies,” and “deprives district courts of the United States of the opportunity to contribute to the development of bankruptcy law in the jurisdictions of those district courts.” It further notes that, “reducing forum shopping in the bankruptcy system will strengthen the integrity of, and build public confidence and ensure fairness in, the bankruptcy system.”

Milwaukee Bankruptcy Attorneys 

According to a press release from the bankruptcy reform bill’s sponsors, “In the last 20 years, more than 70% of public companies with at least $100 million in assets filed for bankruptcy in a district outside of the one closest to their headquarters.” This is a shocking statistic, but we have frequently seen what we would consider Wisconsin companies file for bankruptcy in other states. 

Whether the law passes or not, the Hanson & Payne team has full confidence in the quality of the United States Bankruptcy Court for the Eastern District of Wisconsin and the competence of the judges who practice here. We will continue to serve clients who are involved in bankruptcy proceedings here in Milwaukee and across the state of Wisconsin. Please contact us today if you think we can be of service to you.