Creditors in bankruptcy have a unique set of issues and problems. This page provides information and answers to frequently asked questions pertaining to creditors in bankruptcy.
What is a creditor? A creditor is someone (or some entity) that has a right to payment or other remedy against/from the debtor who is the subject of the bankruptcy filing.
Your options as a creditor depend on which bankruptcy chapter was filed, how your claim arose, and what is going on in the bankruptcy case.
In addition to representing debtors, I also represent creditors (those who are owed money by someone filing bankruptcy) in bankruptcy cases, so if you are interested in retaining me to handle a matter, either call or
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Frequently Asked Questions About Creditor Rights
Q: What is the automatic stay?
A: This is an injunction that goes into effect automatically upon the filing of a bankruptcy. It strictly prohibits the commencement or continuation of any acts to collect on a debt that arose prior to filing the bankruptcy. This includes enforcement of judgments, creating or perfecting liens, and many other actions. (It does not apply to collecting alimony maintenance and support).
Q: You’re owed money by a debtor and they file a bankruptcy. Next, you get a letter from the bankruptcy trustee demanding that you return money the debtor paid to you prior to the bankruptcy case being filed. How can this possibly be legal and what can I do?
A: You have been bitten by the preference bug. In order to maintain some semblance of equality, the bankruptcy code does not allow a debtor to prefer one creditor rather than another by repaying some creditors before the bankruptcy is filed but not others. Thus, any payments made on a prior debt within 90 days before a bankruptcy filing (or within one year if you are a relative or insider of the debtor) is recoverable by the bankruptcy Trustee UNLESS you have one of the many defenses available. You should check with an attorney if this should arise. You may also wish to take preventive steps if you are accepting payments from a client who you think may be going bankruptcy soon. See more about dealing with lawsuits from a bankruptcy trustee.
Q: Can I still try to collect on a judgment after the debtor files bankruptcy?
A: No. However, you may have rights to pursue in the bankruptcy depending on what chapter was filed and whether you are secured by any of the debtor’s property.
Q: I hold a trust deed on the debtor’s house and I am in the process of foreclosing when a bankruptcy is filed. What should I do?
A: First of all, you cannot proceed with the foreclosure. What you do next depends on what chapter the bankruptcy case was filed under and what the debtor’s intentions are with respect to the property. If the property is the debtor’s principal residence and the case filed is a Chapter 13, he will be required to stay current with your payments from that point forward and propose a plan to repay the past due amounts. You should either obtain a copy of the debtor’s statement of intentions or contact the debtor’s attorney to find out what his plans are with respect to your collateral. If the debtor filed a Chapter 7 case, you can obtain permission from the court (via a Motion for Relief from the Automatic Stay) to allow you to proceed with your foreclosure.
Q: Can the debtor lien strip (reduce the value of) or remove my lien against his/her real property?
A: If the real property is the debtor’s principal residence, only under the following circumstances:
- The debtor filed a Chapter 13.
- Your lien is a junior, non-purchase money debt.
- The value of the real property is LESS than the sum of all senior liens.
If the real property is not the debtor’s principal residence the lien can be partially or fully avoided depending on the value of the property. (Again, only in ch. 13).
If you have a judgment lien (rather than a consensual trust deed based on a loan) against the debtor that has attached to her property prior to the filing of the bankruptcy case, the debtor may be able to avoid your lien even in a chapter 7 if it impairs the debtor’s homestead exemption as that term is defined in the bankruptcy code, based on the value of the property and amount of senior liens and encumbrances on the date the bankruptcy case is filed..
Obviously this is a tricky area of law and you should consult with an attorney if you are faced with any of these scenarios.
Q: I’m an unsecured creditor. How do I make sure the debtor is paying everything he should or that he has included all his assets?
This depends on what chapter is filed and how much you want to spend investigating everything. The bankruptcy papers that are filed may be obtained from the clerk of the court. You can review these papers to see if anything seems inaccurate to you. You may also obtain court approval to take the debtor’s deposition if you wish to inquire in more detail as to the debtor’s assets and debts.
Q: What types of debts can be prevented from being discharged in a chapter 7 case?
A: See details on dischargeable debts.
Q: What types of debts can be prevented from being discharged in a chapter 13 case?
A: Mostly the same as listed above for Chapter 7, but there are some exceptions.
Q: What are the criteria for objecting to the debtor’s discharge in total?
A: See denial of discharge information.
Q: I am in the middle of a lawsuit when the defendant files bankruptcy. What happens now?
A: The lawsuit must not proceed unless and until you obtain permission from the bankruptcy court. There may or may not be reasons for doing this (such as to determine, i.e. liquidate, the amount that is owed to you).
Q: How do I get the debtor to reaffirm my debt?
A: Debtors may choose to reaffirm certain pre-bankruptcy obligations. This reaffirmation turns the debt into a post-bankruptcy obligation. This is desirable for creditors, but almost never for debtors. Extreme care must be exercised in seeking a debtor’s reaffirmation as there are increasing court and other legal requirements for doing so.
Q: How do I determine the deadline for filing a proof of claim?
A: Shortly after the bankruptcy filing, the court sends out a notice of bankruptcy that includes information regarding the date, time and place of the first meeting of creditors, the deadline for filing proofs of claim, and deadline for filing objections to discharge.
Q: May a debtor add additional creditors after the case has been filed?
A: Yes. This may be done at any time. A debtor may also amend to correct or add any other information contained in the papers.
Q: If I was not listed in the bankruptcy and didn’t receive notice, can my debt still be discharged?
A: Generally, a debt that is not listed or scheduled on a bankruptcy petition will not be discharged unless the creditor has notice or actual knowledge of the case in order to timely file a proof of claim. HOWEVER, if it is a no asset bankruptcy (meaning, no distribution would be made), most courts hold that the debt will be discharged even if it was not listed since there would be no distribution in any event. If you have grounds for objecting to the debtor’s discharge, that time period may be extended if you received no notice of the bankruptcy.
Q: Should I attend the first meeting of creditors (341a Meeting)?
A: Generally speaking there is no great benefit to attending. Although, this depends on what chapter was filed and what the circumstances of the particular debtor is. Due to time constraints, questioning by creditors at these meetings is very limited. If you wish to discover information about the debtor, your better course is to seek court approval to take the debtor’s deposition (under Bankruptcy Rule 2004).
Q: If the debt is guaranteed by a third party, can I still pursue that party in collections during the debtor’s bankruptcy?
A: Generally, yes. But, in a chapter 13 the automatic stay also protects co-obligors on consumer debts. Under such circumstances, you would need to seek court approval to proceed against the third party.
by, Mark Markus