Des Moines, IA (Law Firm Newswire) January 2, 2013 – Contracts cannot negate bankruptcy protection.
It’s a very simple principle, one that has its origins in a U.S. Supreme Court decision in 1938. In Johnson vs. Zerbst, the court defined a “waiver” as the “intentional surrender of a known privilege or right.” A bankruptcy discharge, coupled with the benefits of starting over debt-free, is considered a privilege. Thus, any clause in a contract that attempts to render an obligation invalid in a bankruptcy is attempting to negate bankruptcy protection. However, the bankruptcy code states this is non-enforceable, remarked Kevin Ahrenholz, an Iowa bankruptcy lawyer.
In other words, to try and waive bankruptcy protection is against public policy and cannot be condoned. The whole point of bankruptcy law is that it supersedes any pre-existing agreements in order to assist debtors. The bankruptcy code also aids creditors by helping them get paid by a trustee, one in charge of liquidating assets to pay unsecured creditors. Waiving bankruptcy protection makes no sense, and literally undermines the whole reason for being of the process.
It is interesting to note that although the U.S. Constitution protects the right to enter into contracts, Congress has the right to set up bankruptcy laws. In short, federal bankruptcy law takes precedence over contract terms, and that is why there is the legal terminology "notwithstanding any provision in a contract" in the bankruptcy code.
The “notwithstanding” clause overrides any contract terms.
Thus, when a debtor files for bankruptcy protection, all of his property, and that includes contracts, becomes part and parcel of the bankruptcy estate, and that contract is invalid and non-enforceable. What this also means is that if a creditor attempts to enforce this contract in the face of the automatic stay, the court may well issue sanctions against that creditor.
For those worried about protecting their financial interests, become a secured creditor. This means a creditor with liens in place against a debtor, typically gets the value of the collateral, when a debtor files for bankruptcy protection, and that holds true whether or not the collateral is non-exempt or exempt property, indicated Iowa bankruptcy lawyer Ahrenholz. For example, if there is non-exempt property, the proceeds of the sale must be shared amongst all unsecured creditors, and in many cases, they would then only get pennies on the dollar.
There is another option to shoring up one’s security, and that is contract around the automatic stay. This is something that really needs to be discussed with an Iowa bankruptcy lawyer, because some jurisdictions may not enforce that type of a contract term.
Kevin Ahrenholz is an Iowa bankruptcy lawyer and Iowa bankruptcy attorney. To contact an Iowa bankruptcy attorney, Iowa bankruptcy lawyer, or set up an appointment, visit http://www.iowachapter7.com or call 1.877.888.1766.
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Des Moines, IA 50309
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