When notice of a bankruptcy filing arrives, creditors often assume that all is lost.
They don’t realize that creditors have rights and some alternatives with respect to their claim against the debtor. Creditor rights were strengthened in the 2005 changes to bankruptcy law.
Some creditors are less exposed than others. Claims that arise in family law matters, like support or property division, enjoy more protection in bankruptcy law than other claims.
Claims that are secured by assets generally pass through bankruptcy unaffected. The debtor has some rights to avoid involuntary liens that interfer with exemptions.
Creditor rights
1. To share in any distribution from the bankruptcy estate according to the priority of their claim. Most unsecured, non wage claims come low in the priority scheme, and may receive little or nothing.
2. To be heard by the court in matters concerning the debtor’s plan (in chapters 11, 12, and 13), the liquidation of the debtor’snon exempt assets, and payments from the assets of the estate.
3. Challenge an individual debtor’s right to a discharge or to discharge the creditor’s particular debt.
Creditor to-do list
1. Cease any collection action, including telephone calls, billing or law suits that might be pending against the debtor. The automatic stay protects the debtor and his property from all forms of collection during the bankruptcy. In Chapter 13, the stay also protects co debtors on consumer debts.
2. File a claim with the court. The notice of the bankruptcy sent by the court clerk tells you where to file a proof of claim and the deadline for filing. Act promptly since deadlines are strictly enforced in bankruptcy case.
Attach a copy of any contracts or judgment concerning your claim, or a summary of the claim, if the supporting documents are voluminous to the proof of claim form. Get the claim form on line if the court did not send one to you.
3. Consider whether your claim is dischargeable. Certain kinds of claims are non dischargeable in an individual’s bankruptcy case. (Corporations don’t get bankruptcy discharges except in Chapter 11). Examples of nondischargeable claims are certain obligations arising in divorce, debts incurred by fraud or willful and malicious acts by the debtor, or damages arising from drunk driving.
Consult a lawyer promptly if your claim arguably falls in one of those categories where you must file an adversary proceedingin the bankruptcy case to preserve your claim after bankruptcy: the time lines are very short in bankruptcy. The complete list of debts not dischargeable in Chapter 7 is found in 11 U.S.C. 523.
4. Determine whether your claim is secured by the debtor’s assets Secured creditors have a lien giving them specific rights to the property which is the collateral for their claim. Most often, those rights are created by, and described in, a deed of trust on real property, a security agreement on personal property, or a judgment lien. Secured creditors have the best chance of getting relief from the automatic stay or “adequate protection payments” to prevent a decline in the equity available to secured their claim. Read more about relief from stay.
5. Share information with the trustee. If you have real information about assets or transactions of the debtor that don’t appear in the bankruptcy schedules, provide that information to the trustee. Creditors and other parties in interest can help trustees find assets from which claims can be paid. If the debtor has been deliberately dishonest, the trustee or a creditor can challenge his right to a discharge in bankruptcy.
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