Phantom Creditors In Bankruptcy

phantom creditors

Phantom creditors often waft through the lives of debtors.  The client may not see them, but as debtor’s lawyers,we must pull those creditors into the light.

Phantom creditors may have no claim against the debtor personally, but nonetheless, need to be scheduled.

Liabilities of property

In rem is nifty sounding Latin, the original language of  Anglo-Saxon lawyering.

It’s defined as an action “against a thing”.  It concerns the property, rather than the person.

In bankruptcy we encounter it most often when a creditor seeks relief from stay in rem.  Generally, the creditor  seeks to make the ordered relief follow the “thing”.   It comes up when the property has been transferred from hand to hand, each new hand filing bankruptcy to get the stay.

But more generally, looking at the client’s holdings, in rem, reminds us that “creditor” includes entities with rights in the debtor’s property, even in the absence of personal liability.

Section 506 gets wordy as it describes a secured claim.  It is one where the creditor has rights in the debtor’s interest in property.  Note it doesn’t speak at all about personal liability.

And that’s where our clients can get hung up in providing the information necessary to prepare accurate schedules:   they think only in terms of  debts they are liable for.  They miss that bankruptcy deals with debts their property is liable for as well.

In rem in the real world

Secured claims for which the debtor had no liability popped up in my practice lately when the debtor had been deeded an interest in a home already subject to a mortgage lien.

The client had not signed the note nor the deed of trust that secured it.  Yet the obligation encumbered the client’s interest in the home, and thus had to be added to the list of secured claims in the case.

Expand your client interview

We’ve talked before about language-induced misunderstandings between client and lawyer.

Make sure you have questions and phrases that will flush out any secured claims for which the client isn’t liable.


Image courtesy of Flickr and Sebastia Giralt.