It is quite common for home improvement contractors to seek the protections offered by the Bankruptcy Code when facing a dispute arising out of a home improvement contract. There are several reasons contractors may want to consider taking advantage of Bankruptcy prior to, during, or after litigation of a home improvement contract dispute.
Bankruptcy Offers the Protection of the Automatic Stay
When you file for bankruptcy protection, the “automatic stay” immediately stops all actions by creditors to collect, enforce or even establish their claims. Civil law suits are immediately stopped, as are any processes to attach or levy money or property that might be used to satisfy a later judgment. In many home improvement contract disputes, a homeowner will seek an order attaching real estate, bank accounts or equipment to ensure that those assets will later be available to seize if the homeowner prevails. For a contractor, the attachment of a business bank account can have a crippling effect on the operation of the business. Once under the protection of the Bankruptcy Code, homeowners and other creditors are prohibited from attaching any property, allowing the contractor to continue to operate its business freely while defending the claims made against them in bankruptcy court.
Liabilities can be paid through a Court Supervised Reorganization Plan.
When you file a bankruptcy petition under Chapter 13 (individual, sole proprietors) or Chapter 11 (corporations, LLCs), you propose a plan of reorganization that establishes a plan to repay some or all of the debts. In most cases, the plan will propose a fixed monthly payment that will last three to five years. The amount of this monthly payment is based on the contractor’s ability to pay, not the amount owed. The Bankruptcy Code takes into consideration the gross income and expenses of business, and the reasonable living expenses of the business owner. In many cases, the contractor will pay only a percentage of the total debt that is owed. This can be a great benefit.
On the other hand, outside of bankruptcy, if an contractor is found liable to a home owner following a lawsuit or arbitration, he can be required to pay the claim in full, immediately. Under Massachusetts law, a judgment can be enforced by attaching and seizing assets including real estate, equipment, bank accounts and other property. This can have a devastating impact on an contractor’s business and personal life. Moreover, an unsatisfied judgment will accrue interest at a rate of 12% each year, so the judgment will grow and grow at an above-market interest rate until it is paid in full. In a bankruptcy plan, a homeowner’s judgment against a contractor will not typically accrue interest once the bankruptcy case has been filed. Invoking the protections of Bankruptcy shifts control over when and how much a contractor must pay, while allowing the contractor to continue operating their business without losing property.
Litigation Costs Can Be Shifted to Creditors.
This is huge factor that is not commonly understood. In Bankruptcy Court, there is what is known as an adversary proceeding, which functions much like a civil lawsuit in state or federal court. In home improvement contract disputes, adversary proceedings are frequently used to determine liability under a home improvement contract or, if liability has already been determined in a prior proceeding, to determine whether the claims are excluded from discharge under one of the enumerated exceptions in the Bankruptcy Code. The costs of litigation in an adversary proceeding are generally born by the bankruptcy estate and are paid through the pot of money that the contractor pays through his or her bankruptcy plan. Because costs of administration, such as attorneys fees, are given a higher priority than claims of creditors, money that would otherwise be paid to creditors is directed to the payment of attorney’s fees, without increasing the total overall cost of the payment plan. This is unlike the general process of litigation in which each party pays its own costs. This can make bankruptcy a far less expensive option than litigation in state court or arbitration. In bankruptcy, unlike outside of bankruptcy, a contractor can often get a defense attorney without a large upfront retainer.
Claims Arising From Home Improvement Contract Disputes are Generally Dischargeable in Bankruptcy Proceedings
With certain exceptions, most types of debt can be discharged in bankruptcy. Among the exceptions to discharge are debts for money, property or services to the extent they were obtained by false pretenses, false representations or actual fraud, embezzlement or larceny, or for the intentional injury of another person or their property. In home improvement contract disputes, the homeowner and the contractor often tell two very stories. The home owner, whether justifiable or not, will often claim that the contractor intentionally injured or defrauded them in order to have their claim excluded from the bankruptcy discharge. In order to exclude their claim, the homeowner must prove by a preponderance of evidence that their claim falls into one of the exceptions to a general discharge. The Bankruptcy Court construes exceptions to discharge narrowly in favor of debtors in order to further the Bankruptcy Code’s goals of giving debtors a fresh start. Unlike in typical litigation context, in bankruptcy proceedings, the homeowner must not only prove that the contractor breached the home improvement contract, but also that contractor acted dishonestly or with the intent to cause harm. This is a much higher standard than homeowners must meet in state court or arbitration, and it can be very difficult for a homeowner to meet this burden. In these cases, unless there is clear evidence of fraudulent conduct or intentional harm, the contractor has a distinct advantage in having its case heard in Bankruptcy Court.
Contact Us for Free Consultation
We understand how the Bankruptcy Code can protect contractor against claims from homeowners. We are highly experienced in defending objections to discharge of claims arising under the Massachusetts Home Improvement Contractors Regulations and can help you determine whether filing for protection under the Bankruptcy Code is the right way to protect your business and property at any stage of a home improvement contract dispute. Whether you have just received a demand letter from a homeowner or are in any stage of the litigation process, you can contact our office any time to discuss your case with one of our experienced attorneys.