Creditor Rights and Protecting Judgment Debt in Bankruptcy

Posted on September 18, 2018 at 12:00pm by
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This is syndicated content that was originally published on by Attorney Michael J. Wambolt of Sader Law Firm.

For creditors holding large judgments against individual debtors with substantial disposable income, there is always the risk that debtor will pursue a Chapter 7 Bankruptcy as a means to avoid payment.

1. Creditors May File a Motion to Convert a Debtor’s Case from a Chapter 7 to a Chapter 11 Bankruptcy

If a creditor’s judgment is based on a simple breach of contract or guaranty claim, it is unlikely the judgment debt can be excepted from discharge under Section 523 of the Bankruptcy Code. In addition, dismissal or conversion of a debtor’s case may not be an option under Section 707 of the Code if the debtor’s debts are primarily business as opposed to consumer in nature. Fortunately, Section 706(b) of the Code allows creditors to file a motion to convert a case to Chapter 11 regardless of whether the debtor’s debts are primarily consumer or business in nature. See e.g. In re Schlehuber, 489 B.R. 570 (8th Cir. BAP 2013).

2. Judgement to Convert or Not Convert is at the Discretion of the Bankruptcy Court

Since Section 706(b) is silent as to the grounds for conversion, the decision on whether to convert is discretionary based on a bankruptcy court’s determination of whether conversion will be of benefit to all parties in interest. Id.; see also Willis v. Rice (In re Willis), 345 B.R. 647, 650-21 (8th Cir. BAP 2006). Since there are no specific grounds for conversion, a court should consider anything relevant that would further the goals of the Bankruptcy Code. Proudfoot Consulting Co. v. Gordon (In re Gordon),465 B.R. 683, 692 (Bankr.N.D.Ga.2012) (citing In re Lobera, 454 B.R. 824, 854 (Bankr.D.N.M.2011)). That said, a debtor’s ability to make payments under a Chapter 11 Plan is far and away an important factor under 706(b). Schlehuberat 573. Placing an emphasis on a debtor’s ability to pay makes conversion under 706(b) an appealing course of action when faced with a judgment debtor, e.g. doctors, athletes, or other high-earning professionals, who have substantial disposable income and lead relatively lavish lifestyles.

3. The Benefits of Filing a Motion to Convert

The obvious advantage of forcing a debtor into a Chapter 11 is as follows. The debtor’s post-petition income becomes property of the Chapter 11 estate, which the debtor must dedicate to fund Chapter 11 Plan payments. See 11 U.S.C. ** 1115(a)(2), 1129(a)(15). That means the debtor now has to dedicate his or her income to making plan payments for the benefit of creditors, rather than funding shopping trips, vacations, or purchasing new cars. Over the course of a five-year Chapter 11 Plan, the amount paid towards a creditor’s judgment debt could be substantial and well worth the fees and expenses incurred in getting a debtor’s case converted under Section 706(b). Of course, conversion under 706(b) is not a given and each case should be carefully evaluated prior to pursuing a motion to convert in a debtor’s Chapter 7 Bankruptcy. That said, any evaluation of a high-earning judgment debtor’s Chapter 7 Bankruptcy case should include a look at whether conversion under Section 706(b) is a viable and cost-effective means of protecting and collecting on a judgment award.

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