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Gavel to Gavel: The uphill battle faced by creditors in bankruptcy

Bankruptcy is a debtor’s remedy, meaning many of the rules and regulations are more favorable to debtors than to creditors. To even the playing field a bit, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005.

Gretchen Latham Web

Gretchen M. Latham’s practice focuses on representing creditors in foreclosure, bankruptcy, collection and replevin cases.

Several of its provisions were put in place to provide assurances to creditors that the system is fair and impartial. Of note, those that file must now undergo credit counseling both prior to filing and prior to receiving a bankruptcy discharge.

Also of significance are the changes to the Bankruptcy Code regarding what chapter of case a debtor is eligible to file. Prior to enactment of BAPCPA, many creditors were missing out on substantial payments because most debtors elected to file a Chapter 7 case, which acts as a total liquidation of debts, other than debts that are reaffirmed. The result was that most unsecured creditors were losing out on repayment of their entire outstanding balance.

With BAPCPA, debtors are no longer free to decide what type of case to file. Rather, a complex mathematical computation is performed prior to filing, and if the results show a debtor has funds available to repay a portion of their unsecured debt, that debtor may be required to file a Chapter 13 case.

Chapter 13 is similar to debt consolidation, in that the debtor proposes a plan of repayment to all creditors, to include paying back a percentage of unsecured debt. The result is that unsecured creditors, such as credit card companies and medical providers, receive some payment.

A creditor is also permitted to file an objection to the proposed repayment plan. The most common objections are to the interest rate and value of secured claims. There are other bases for objecting, including that plan is not feasible or that the case was filed as a delay tactic.

Aside from having a statutory basis for objecting, a creditor must also adhere to the Bankruptcy Court’s local rules when objecting to avoid the risk of an improperly filed objection.

While bankruptcy is still a very viable option for those with overwhelming debt, the arena is now viewed as being much more equal. Creditors have many tools at their disposal when a consumer files bankruptcy and should take full advantage of those tools to maximize repayment where possible.


By Phillips Murrah Attorney Gretchen M. Latham

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on March 7, 2019.

Avoid a clawback

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on September 13, 2018.


Clayton Ketter

Clayton D. Ketter is a Director and a litigator whose practice involves a wide range of business litigation in both federal and state court, including extensive experience in financial restructurings and bankruptcy matters.

By Phillips Murrah Director Clayton D. Ketter

A business owner learns that one of her customers has filed for bankruptcy. She rushes to check her books and breathes a sigh of relief after seeing that the customer paid all of their outstanding invoices just days before going bankrupt. Unbeknownst to the business owner, those payments may have to be paid back to the bankruptcy estate as a preference.

One of the principal policies underlying bankruptcy law is fairness to creditors, which attempts to ensure that similarly situated creditors are treated equally. To promote this goal, creditors in a bankruptcy are placed into classes, with members of each class sharing proportionally in distributions of a bankrupt debtor’s assets.

This policy can be hampered when a debtor pays a preferred creditor immediately before a bankruptcy, to the detriment of other creditors. To ensure that a debtor’s limited money does not disappear to creditors favored by the debtor, the Bankruptcy Code allows a bankruptcy trustee to claw back such payments.

A payment is considered a preference if it meets five criteria: It is made to a creditor; for a debt owed prior to the payment being made; while the debtor was insolvent; during either 90 days before the bankruptcy filing for ordinary creditors or one year for insiders of the debtor; which allowed the creditor to receive more than it would have received in distributions from the bankruptcy estate.

If a payment is a preference, it must be paid back to the trustee unless a valid defense can be established.

Several defenses are available to creditors, including for substantially contemporaneous exchanges. Typically, point-of-sale transactions and those that involve cash on delivery will meet this defense. Another common defense exists for payments made in the ordinary course of business, which analyzes the typical transactions between the parties and in the relevant industry. If it is common for a debtor to pay invoices within 60 days of delivery, for example, those payments may meet the ordinary course defense.

Businesses can take steps to shield payments received from financially troubled customers from being subject to preference liability. The most effective means is to require prepayment, COD, or point-of-sale transactions only. Businesses can also strategically apply payments to invoices in a manner designed to fit within preference defenses.

To recover a preference, the bankruptcy trustee must commence a lawsuit within the bankruptcy case, typically preceded by a demand letter. Any business that receives such a letter should consult with bankruptcy counsel to determine whether they have valid defenses to the claim. Consulting with a bankruptcy attorney is also advisable prior to entering into sizable business transactions with a financially troubled company to attempt to eliminate preference risk. Doing so can help reduce the risk that a business gets embroiled in a bankruptcy, and worse, has to repay money that it was owed.

Clayton D. Ketter is a litigation attorney at Phillips Murrah P.C. who specializes in financial restructuring.

Why Weinstein’s creditors hired bankruptcy counsel

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on November 16, 2017.


Clayton D. Ketter is a Director and a litigator whose practice involves a wide range of business litigation in both federal and state court, including extensive experience in financial restructurings and bankruptcy matters.

By Phillips Murrah Director Clayton D. Ketter

Since the onslaught of sexual misconduct allegations against Hollywood producer Harvey Weinstein, his film studio, The Weinstein Company, has wasted no time in firing its founder. Yet, the namesake studio has been unable to distance itself from Mr. Weinstein’s bad press, and it is questionable how willing moviegoers will be to support anything associated with the toxic moniker. This has prompted speculation that a bankruptcy is looming.

While The Weinstein Company has not filed for bankruptcy, and denies any plans to do so, some of the company’s debtholders reportedly have already retained bankruptcy attorneys. Why? At first glance, it may seem odd for creditors to hire bankruptcy counsel before a filing is even initiated. However, there are strategic reasons as to why early retention makes sense.

Often, a company facing financial pressure will attempt, prior to filing, to work with its largest lenders to craft a strategy that is mutually beneficial to all parties. Cooperation among debtors and creditors increases the likelihood of a successful bankruptcy and can significantly reduce associated attorneys’ fees.

Even if the parties won’t work together, bankruptcy counsel can provide vital pre-bankruptcy assistance to a creditor. It is normal for the debtor to file a number of pleadings on the day the bankruptcy is commenced or shortly thereafter. These typically include mundane items such as authority to continue to use bank accounts, pay employees and employ legal professionals. However, it is also possible for significant relief to be requested as part of these first-day motions, including post-bankruptcy financing arrangements or even requests to liquidate assets. Having bankruptcy counsel at the ready and fully engaged allows a creditor to immediately respond to any such requests to ensure the creditor’s rights are protected.

Should The Weinstein Company file bankruptcy, it is likely to begin with a motion seeking to liquidate its highly portable assets, which include its film library, and movie and television development projects. Those assets could be acquired by a rival studio and washed of the Weinstein name, thereby increasing the potential value. The Weinstein Company’s significant creditors would want to ensure that they won’t get blindsided by a sudden bankruptcy filing and a first-day motion to sell. Their early retention of bankruptcy counsel will help prevent such a scenario from happening.

Clayton D. Ketter is a director and litigation attorney at Phillips Murrah P.C. who specializes in financial restructuring.