What Happens to Creditors in Bankruptcy?
The worst thing a creditor or lender can hear or find out is that the party that has its funds has filed for bankruptcy. It sends a chill through the spine of the creditor and more often than not, a feeling of complete loss of any recovery. However, the process of bankruptcy can provide some recourse. Knowing how the process works, a creditor can make sure its interests are heard and, sometimes, partial or even full recovery is possible.
Other People Are Reading
-
Bankruptcy Filing
-
Two of the most common bankruptcy risks for creditors are a debtor filing for discharge of debts or reorganization of finances. In either case, the initial legal reaction required from a creditor is the same: It has to temporarily stop trying to collect your funds until the court has made a decision. Chapter 7 filings are essentially a request to the court to discharge all debts. This is the worst-case scenario for a creditor. The court may completely discharge any debts on the books if it feels the filer has nothing worth liquidating outside of exempted assets (such as a home with little equity, for example). If discharged, the creditor has lost any chance of recovery. If partially discharged, then the court will identify what portion of liquidated assets will go toward paying some of the creditor's claim.
Chapter 13
-
A Chapter 13 filing is a better scenario. While a creditor will have to wait longer to get paid back, a Chapter 13 filing approved means the debtor's finances are only being reorganized, not discharged. So the debtor may get a longer time period to pay his debts. There may be loss of interest no longer being allowed to be charged, but the principal amount owed to the creditor will still get paid back.
-
Rights of Creditor
-
Creditors have a right to share in any court-liquidated assets based on the specific creditor's priority. Secured credit agreements get first dibs, while unsecured creditors with no collateral involved usually end up with little or nothing.
Creditors can challenge a bankruptcy filing and discharge if they can prove the debtor does have the ability to pay his debts. This is a bit hard to do, but it is possible. And the court will favor a creditor if credible proof is provided.
The creditor also has a right to make a statement to the court when it reviews a debtor's plan on how to reorganize, in liquidation matters, and on how payments will be changed and handled under a new scenario approved by the court.
Creditor Actions
-
Again, creditors have to temporarily stop collection activities when the bankruptcy is officially filed. This includes phone calls, invoicing, legal action or in-person confrontation on the matter with the debtor.
Creditors have to file their claim in court in a bankruptcy to be recognized by the court. The court will send a notice and creditors have to respond timely.
Creditors with secured debt should identify it so they can place a lien on the specific property as it goes through bankruptcy. This gives a priority of payment if the asset is liquidated by the court.
Creditors are obligated to share information with the court trustee to show if a debtor is hiding funds or has the ability pay debts.
Reaffirmation
-
Despite bankruptcy, a creditor can still get paid if he can convince the bankrupt filer to reaffirm his debt with the creditor after exiting bankruptcy proceedings. This is a bit tricky in that the debtor is under perjury when telling the court he can't pay his bills but then after the fact reaffirms to a creditor he can do so. If he does, the creditor can collect on the discharged debt again just as before. The reaffirmation become legally binding on the ex-debtor.
-
References
Resources
- Photo Credit bank statment and cut credit card image by Warren Millar from Fotolia.com
