As published in The Star-Ledger, February 19, 2012
Q. In November 2011, I loaned $3,000 to an acquaintance who said he’d pay me back within a month with $300 interest. The only evidence I have of the conversation is a post-dated check from him for $3,300. Prior to the check date, he told me to hold off on cashing the check. The following week he told me he lost his job but he still planned to pay me back. I’m now considering legal action. Is the check enough proof of the loan? What are my chances of getting my money back since he lost his job and filed for bankruptcy?
– Want my money back!
A. Your legal options are limited now that this acquaintance has filed for bankruptcy protection.
Upon a bankruptcy filing, an “automatic stay” goes into effect, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne.
“Generally, the automatic stay of the bankruptcy code precludes pre-bankruptcy creditors from commencing or continuing any state court collection action or proceedings,” she said. “Thus, you cannot commence a collection proceeding against the debtor at this point.”
You do still have rights. First, Hook said, you can file a proof of claim against the debtor’s bankruptcy estate. You will need to provide the court with any documentation of your claim.
“You may want to speak with a collection attorney to discuss issues such as whether the absence of a written Note precludes you from collecting the debt, or whether your initial agreement to hold off cashing the check extended or terminated the previously agreed upon due date of the loan,” she said.
Assuming you have a valid claim, Hook said, you will share – on a pro rata basis with other general unsecured creditors – any distribution made by the bankruptcy trustee. If the debtor has no assets, you may not receive any funds. If the debtor receives a discharge, he will be relieved of the burden of paying the debt.
In such a case, your recovery will be limited to the amount received, if any, from the bankruptcy estate, she said.
Your other right as a creditor, Hook said, is to challenge the discharge of the debt if you were defrauded and you can show he never intended to pay you back.
You would need to bring a lawsuit called an Adversary Proceeding within his bankruptcy proceeding and prove to the court that the loan was obtained by false pretenses or false representations by the debtor, Hook said.
“The burden of proof is on you,” she said. “As a practical matter, the time, cost and legal fees involved would probably outweigh the amount owed to you.”
If the bankruptcy was filed before you loaned him the money, your debt is still valid and you are in an even better position than before because he discharged his other creditors, said Ronald LeVine, a consumer law attorney based in Hackensack.
If the loan came before the bankruptcy, unless you can prove that he defrauded you, LeVine said it will be discharged and you will be out of luck.
- A "Biz Brain" column by Karin Price Mueller