When a debtor files for Chapter 7 bankruptcy, a creditor can request a supplemental proceeding if there is a question of the settlement of a debt. An appeals court recently ruled that liens by creditors made after supplemental hearings could be enforced, despite the fact that the issues may be unresolved or there may be error on the part of the creditor.

This decision springs from a case in which the debtor owed $1.7 million to Town Bank, which requested a supplemental hearing in the debtor’s bankruptcy case. However, the debtor assigned his interest in a lawsuit settlement to another creditor, Heartland Wisconsin Corp. Town Bank promptly pleaded with the court to honor what it considered a prior claim due to the supplemental hearing.

While the bank had failed to file the documents related to the supplemental hearing with the clerk of the Circuit Court, Town Bank had served the debtor. Heartland argued that the supplemental hearing was flawed and created a “secret lien” that was not evident to other creditors who might be filing their own actions. However, the appeals court ruled that Town Bank’s only responsibility was to serve the debtor; the responsibility for filing with the clerk rested with the supplemental commissioner.

The essence of this ruling was to make it clear that property acquired after a supplemental hearing can still be attached to pay debts. If a debtor is facing a complicated creditor matrix and large debt structure, it is very important for him or her to consult a bankruptcy attorney to ensure that all rules and regulations are followed in the filing of the action.

Source: State Bar of Wisconsin, “Creditor Liens Still Attach to Property Acquired After Supplemental Proceeding,” Joe Forward, Dec. 13, 2012