Some one who owes you money just filed bankruptcy. You want to know: what are creditor rights in bankruptcy?
Do you have any rights? What now, and how?
First things first.
If you got notice of the bankruptcy filing, that paper tells you a critical item: there is now a federal court injunction preventing you from pursuing your claim anywhere but bankruptcy court.
Violate that injunction, knowingly, and you will owe the debtor money, not vice versa.
More about the automatic stay
Let’s walk through some of the most frequent questions a creditor asks about someone else’s bankruptcy.
Who is the bankruptcy trustee?
In a Chapter 7, the trustee is named on the notice of the first meeting of creditors sent to every listed creditor. That information is also available in the case file at the bankruptcy court, and over the phone in some districts.
In most Chapter 11’s, there is no trustee; the debtor assumes the duties of a trustee.
The United States Trustee is different from the case trustee: UST’s are employees of the Department of Justice and have oversight, but not day to day operating responsibilities, in bankruptcy cases.
More about the selection and role of trustees
I got notice of the debtor’s discharge but no payment.
The discharge and distributions on claims are on different time lines.
The fact the debtor got a discharge says nothing about whether you will receive anything on your claim.
The trustee continues administering the assets of the case until the job is done; assets sold; claims are reviewed; fees determined, and the creditors paid to the extent there are assets according to the priority of the claim.
Remember however, that the vast majority of individual Chapter 7‘s have no assets from which creditors can be paid.
In Chapter 7 and Chapter 13 cases, only creditors who filed claims with the court are eligible to share in any distribution.
My employer filed bankruptcy owing me money
Employee claims for wages earned in the 180 days prior to the bankruptcy filing (or the debtor ceasing operations, whichever comes first) are a priority for payment.
Distribution on priority claims may not take place until the case is over, however.
File a claim, check the box on the claim form claiming a priority claim, provide your social security number, and wait.
The claim form is frequently printed on the back of the notice of the first meeting of creditors. You can also get forms from the court clerk or get claims forms online.
Keep the court informed if your address changes; otherwise, they can’t find you to mail the check! Get the proof of claim form
I heard about the case but got no official notice
If you know about the bankruptcy case, even informally, you must act to preserve your rights. You are deemed to know about the case.
Most courts hold that if you have actual knowledge of the case, however obtained, you are bound by the filing deadlines for objections to dischargeability and for filing claims. The automatic stay, and penalties for violating it, also bind you if you have a reason to believe there might be a bankruptcy.
If you wait for formal notice, which may not come, you risk losing rights.
Information on filed bankruptcy cases is available online through PACER.
Once you have the case number, file a request in the bankruptcy court where the case is pending to be added to the Master Address List in the case.
Keep the court informed if your address changes.
How do I get my W-2 from a bankrupt employer?
Contact the trustee in the case immediately. It is a task the trustee is supposed to accomplish.
The trustee has control of, or the right to control, the debtor’s books and records which may be necessary to get the W-2’s generated.
Don’t wait til next year’s tax time to work this issue. By that time, the trustee may have closed his file and disposed of the records.
Again, make sure those involved know where to send the form.
Do I have to go to the 341 meeting to have my claim paid?
No. The first meeting of creditors is a fact gathering event.
Allowance and payment of your claim is not tied to being at the 341 meeting. However, claims must be filed by the time established by the court, and usually set out in the notice of the 341 meeting, in order for the trustee to pay them.
If you choose to go to the 341 meeting, you will have a short time to ask the debtor questions under oath about the assets and debts of the business.
As a creditor, do I need a bankruptcy lawyer?
Not usually. In order to be paid in a bankruptcy proceeding, the creditor usually has to file a proof of claim form. It summarizes the claim and its priority.
In Chapter 11, if you agree with the amount and the classification of your claim shown on the bankruptcy schedules, you don’t have to file a claim to participate in the case.
The bankruptcy papers are available on line through PACER.
You don’t need a lawyer to fill out the form. Attach to the form a copy of the invoice or contract in question, or a summary of the elements that make up the claim.
Claims are freely amendable if you make a mistake or omit something. If you didn’t get a proof of claim form, get one on online.
Can I collect from the corporate officers or shareholders?
That depends on whether there are facts making the officers or shareholders liable for the debt: just being a shareholder, even the only shareholder, doesn’t make one liable for the corporation’s debts.
Those individuals could be liable if they guaranteed the debt or if they ignored the corporation’s separate legal standing to the extent that creditors can pierce the corporate veil.
What if the debtor is fraudulently disposing of assets?
Creditors can file an involuntary bankruptcy against a debtor who is not generally paying his undisputed debts as they come due. 11 U.S.C. 303.
The petitioning creditors must hold a minimum amount in undisputed, unsecured claims. If the court finds that the petitioning creditors have met their burden of proof, an order for relief in bankruptcy is entered, and a bankruptcy case is commenced.
I have a co signor for my claim against the debtor.
What a creditor can do in this circumstance depends on what chapter the debtor filed. Only if the debtor filed a Chapter 13 bankruptcy is a creditor prevented by a bankruptcy filing from collecting from other obligors.
In Chapter 13, the co-debtor stay protects co obligors and guarantors on consumer debts. To proceed against them, a creditor must get relief from stay.
In any other chapter or if the debt is not a “consumer debt”, creditors are free to pursue guarantors or co signors, despite the bankruptcy of the principal.
Can my judgment be discharged?
The discharge of any debt depends on the kind of claim which underlies the judgment and the chapter of bankruptcy involved.
Just because your debt is reduced to judgment does not necessarily insulate it from discharge.
If the judgment is for a contract debt, such as a promissory note or trade account, it is likely dischargeable. If the judgment is one for fraud, it cannot be discharged, if you file a non dischargeability action. Proving your debt survives bankruptcy.
Remember, though, that if the judgment is secured by a judgment lien which attaches to value owned by the debtor, you are a secured creditor, an exalted being in the bankruptcy realm!
Liens generally survive the bankruptcy as a charge on the property of the debtor. The lien may be avoided if it impairs an exemptions or stripped down to the present value of the collateral in a Chapter 13. Either of those require that the debtor file a motion in the bankruptcy court and give the affect creditor notice of the proceeding.
My tenant filed bankruptcy: what can I do?
If the agreement by which the debtor occupied the property has been breached, before the filing, you can seek relief from the automatic stay to begin or continue eviction.
When the leased property is not the debtor’s residence, the trustee or debtor in possession must assume the lease within a short period of the filing, or it is deemed rejected.
If the lease is rejected, the trustee cannot attempt to assign the lease to a third party.
Even though the lease is rejected, the trustee may have a continued right to occupy the property if assets of the estate are located there until they can be sold or relocated.
Know, however, that post petition rent is an administrative claim, which has equal status for payment with the trustee’s commission from the assets of the estate.
If you are the landlord of a bankruptcy debtor, you may need a lawyer to enforce your rights in a timely fashion.
More on creditor rights in bankruptcy
Guide to reading the bankruptcy notice
Image courtesy of Ryan Lerch and openclipart.com
