Written by attorney Hans Christopher Wahl

Creditors Must Respond to a Negative Notice Filed in a Debtor's Bankruptcy Proceedings

In bankruptcy proceedings, the “negative notice procedure" is a method by which certain motions, objections and other matters may be considered by the Court without an actual hearing. The way it works is if a party provides a negative notice, according to the procedures allowed by the respective bankruptcy court, the moving party may obtain an order from that Court without a hearing if the other parties involved fail to respond to the negative notice.

Some bankruptcy courts allow the negative notice procedure for debtors to avoid liens on their property. This process has been used for such purposes in Florida. For example, if a debtor objects to a certain creditor’s lien on his or her property, he can file a negative notice, which requires the creditor to prove the validity of its lien. If the creditor does not, the lien could be extinguished.

In other words, a creditor may have a secured lien on a debtor’s property for an unpaid debt; however, if that debtor files a negative notice and the creditor fails to respond, the bankruptcy court may absolve that creditor’s lien in favor of the debtor. This, however, is up to the discretion of the bankruptcy court, but precedent from various bankruptcy courts around the country suggest that having the lien abolished from failing to respond to a negative notice is a very real possibility.

In a bankruptcy proceeding, the debtor’s filing of a negative notice effectively shifts the burden to the creditor to now overcome the debtor’s objection to the claim. In re Pierce, 435 F.3d 891, 891 (8th Cir. 2006). If the creditor does not challenge or request a hearing, the bankruptcy court is free to disallow the claim. See Id. This means a secured creditor is not just reduced to unsecured status; rather, that secured claim can be completely eliminated.

Bankruptcy courts throughout America have ruled in just such a way. The United States Court of Appeals for the Eighth Circuit upheld the bankruptcy court disallowing a creditor’s claim in part because of his failure to respond to a negative notice. The Eighth Circuit suggested a bankruptcy court could absolve the entire claim instead of allowing it in part and disallowing it in part, which is what the bankruptcy court did in that case. Id. at 892. As another example, the U.S. Bankruptcy Court in the Western District of Texas allowed a Chapter 7 debtor to sell his property free and clear of all liens because none of his claimants responded to his negative notice. In re Stogsdill, 102 B.R. 587, 588 (Bankr. W.D. Tex. 1989). As these cases demonstrate, it is in the court’s discretion on whether to allow a creditor’s claim to remain or not when that creditor fails to respond to a debtor’s negative notice.

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