What Happens At The End Of The Chapter 11 Bankruptcy?
After the Chapter 11 plan has been confirmed, and the debtor is making plan payments as they come due, the next goal is to get the case administratively closed. Typically, the judge will set a post-confirmation status conference for a few months after the day the plan is confirmed.
In the status report that the debtor files prior to the status conference, the debtor will provide a status report. If there are no outstanding issues, then the debtor can petition the court to administratively close the case. This doesn’t mean that the plan has been completed. The debtor must still make the plan payments as they come due. However, if the judge grants the motion to administratively close the case, then the debtor no longer has to pay quarterly fees to the U.S. Trustee fee, which is a real benefit — especially if the disbursements are fairly large — and the debtor no longer has to submit quarterly operating reports.
Once the plan has been completed, the debtor must reopen the case to file two motions.
The first motion is filed in an individual case. It is a request for a discharge upon plan completion. This motion is usually not necessary in a business case because a business receives a discharge at plan confirmation.
The second motion is to obtain the final decree. Once it is granted, the case can be reclosed, and the debtor will have received a discharge of all the debts that were covered in the plan.
- Future Financing
Creditors are interested in making a buck, and they’re not going to turn away a potential borrower if they think the borrower is a good risk. The key word is “risk.” The greater the risk, the less favorable the loan terms.
If a debtor is in bankruptcy, the creditor may be a bit skittish about lending money unless it gets some real benefit. As a result, the debtor may have to pay a relatively high interest rate. If the loan is used to purchase something such as real property, the debtor may be asked to come up with a fairly large down payment to reassure the creditor that the debtor has skin in the game.
The longer it’s been since the debtor had a bankruptcy that was discharged, the less weight the bankruptcy will carry. In sum, obtaining future financing is very fact dependent.
Some very large businesses have gone through bankruptcy, and at completion came out very healthy and successful. As a result, they had no problem getting loans.
There are others that did not succeed and instead ended up in Chapter 7, and dissolution. At that point financing is meaningless because the business ceased to exist.
The same principles apply to individuals. If an individual has gone through a bankruptcy — regardless of chapter — a creditor wants risk reassurance before lending the (former) debtor money.
Ultimately, there are only three things that creditors really care about, and if they ever appear to care about anything else, it’s only in as much as they believe it affects these three things.
First, a creditor wants to know, with a high degree of certainty, that it will eventually receive its principal back in full. For this reason, I instruct my (former) bankruptcy clients to make more than the minimum payments. If the payments being made are more than the required monthly payments, then the creditor is reassured that it will eventually get its money back.
Second, a creditor wants to make a profit (I know, big shock — creditors are not charitable institutions). And how does it make a profit? By charging interest. If a creditor is not going to receive interest from a debtor, it will not be interested in lending money to that debtor. For this reason, I instruct my clients not to pay the entire balance each month. As a consequence, the creditor will receive the interest it wants.
Third, a creditor cares about predictability. It wants to know with a high degree of certainty that the payments will roll in like clockwork every single month. Therefore, I instruct my clients to get the payments in a couple of days early, and not wait until the end of the grace period.
If you do these three things, gradually the interest rates will drop, the available balances will increase, and the bankruptcy will recede into the mists of time. It won’t happen overnight, but it will happen.
- Post-bankruptcy Rebuilding
An individual who has gone through bankruptcy and received a discharge will begin receiving offers for new credit cards and offers to buy new cars. My advice is to get a couple of credit cards, but not buy a car right away unless it’s really needed, because the interest rates will be high.
However, the individual should not stack up on credit cards. Otherwise, the creditors will be concerned that the debtor will take out cash advances on all of them and flee to Argentina. In fact, I knew a person who did just that. He was from Argentina. He had a good job, great credit, and a stack of credit cards. Unfortunately, he was a heroin addict (I was not. I just happened to know him as someone who worked in an optical store.). He was arrested for sale and possession of heroin, and knew he was going to be deported. Therefore, he cash advanced on all the cards, bought clothes, electronics, and a car on credit; and then sold everything and fled to Argentina. Of course, it didn’t have to be Argentina. It could have been any country that didn’t have an extradition treaty with the United States.
I tell the debtor to use the three things creditors care about (see the above discussion in the section entitled, Future Financing) as a way to repristinate the credit history.
I also tell the debtor to open a bank account that I call an Eliot Ness bank account. Unfortunately, few clients know who Eliot Ness was, but they all know who Al Capone was. Eliot Ness was the good guy who arrested Al Capone. They know who the bad guy was, but not who the good guy was. Ness was a member of a group at the FBI called the Untouchables. They were call untouchable because they couldn’t be bribed.
In any event, each month, the debtor should put a few hundred dollars into the Eliot Ness account, and not use it for anything; not food, clothing, or transportation. The money is untouchable. After a year or so, the debtor has enough money in the Eliot Ness account for a down payment on a car. With a year of credit repristinating and a down payment, the debtor will qualify for a good car loan interest rate. The debtor should continue the practices of: (a) depositing untouchable money in the Eliot Ness account, (b) using the credit cards with the three things creditors care about, and (c) making the car payments a couple of days early. A few years later, the debtor will have money for a down payment on a condo or a house. Rebuilding credit and buying a car or home after bankruptcy can be done, but it won’t happen overnight. You have to be patient.
A business can also apply this advice. The difference, of course, is that if a business sells products and is buying from vendors, then it is already developing a future credit history.
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