Squeezing Blood from the Rocks: An Introduction to Creditors’ Rights – Insolvency / Bankruptcy / Restructuring


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The rights of creditors, properly exercised, are a truly unique intersection in the law. When I was an intern with the Honorable William F. Stone, Jr., in the United States Bankruptcy Court for the Western District of Virginia, he said a few things that marked me throughout my life. convenient. First, he told me he started to practice bankruptcy because he often saw the intersection of seemingly disparate areas of law that challenged him professionally. He was right. Depending on the context of a case, the prosecution of an unpaid loan can come into play in criminal law, family law, commercial torts, contract law, real estate law, construction law and various other matters. intermediate places.

Second, he told me that bankruptcy was unique in that he often found himself turning pebbles on the surface, only to find a layer of stones underneath that he turned to find a layer of rocks. “The more you dig, the more you find,” he said. Once again, he was right. Indeed, these stones are the ones we try to pull for real money when pursuing the panoply of rights available to creditors.

As we go through our series on creditors’ rights and explain how best to protect those rights – and how we can help you – we will build on various concepts that we want to present here. Basically, when looking to collect debt, lenders always start with movable paper: the group of loan documents that memorize a specific debt. Often it starts with a loan agreement and a promissory note. From there, a lender can demand several other types of documents, a guarantee (requiring a non-borrower to pay on certain triggers, sometimes conditional, sometimes not; sometimes limited, other times unlimited) and a package of documents. security that could include collateral on everything from real estate to life insurance policies.

Each of these documents contributes something to the contractual relationship. For the note, it’s usually very simple: if a borrower misses a payment, the borrower is in default. For the loan agreement, things can get complicated. Loan agreements contain various provisions including minimum debt ratios, minimum loan / collateral value ratios, etc. Even if a borrower makes every payment, the borrower can still default under any of these provisions. The options open up more with security documents. According to the document, non-payment of premiums to third parties, non-payment of taxes, non-compliance with repairs, non-provision of books and records and various other things can trigger non-payment.

Then, when the borrower defaults and the lender sends a default notice, borrowers respond in multiple ways. Sometimes they just refinance the loan elsewhere. Other times, they start moving money in a way that they believe makes it harder to pay the creditor. At other times, they begin to develop defensive theories which generally fall under the “responsibility of the lender”. Again, a borrower can also file for bankruptcy and seek liquidation or restructuring.

We’ve seen it all (and more) over the years. While there are thousands of tiny variations in the “history” of each loan, they follow similar paths that allow us to quickly spot the best path to recovery. Sometimes this path takes the form of a workout, usually structured by a forbearance agreement or a loan modification. If there are any flaws in the loan documents, this route makes the most sense, as the practice documents can provide a useful opportunity to repair those flaws. Other times the path is simple: repossess and liquidate the collateral and file a complaint about a deficit. Then there are the difficult cases. Some borrowers who find themselves in financial difficulty engage in all kinds of bickering to preserve the lifestyle in which they have largely traveled. Receiverships, injunctions, involuntary bankruptcy petitions come into play in these situations.

In practice, however, every new credit report we get begins with a simple analysis. How much does the borrower owe and, on the best day, what assets should a lender be able to seek out? As you can imagine, complex cases in particular can become costly, and, if all that the lender can pursue is of minimal value, then there will be a lag between what we can do and what we should To do.

As we move through this series, we’ll offer some tips on what lenders can do throughout the process to make this threshold investigation easier, as it’s the most useful question to ask at the start. Is it worth your time and money? We take this issue very seriously.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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