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Creditors Rights and Bankruptcy
An Overview
Unless you are a creditor that deals with bankruptcy on a regular basis, it is difficult to know your rights. Many times, small creditors that do not deal with bankruptcy on a regular basis assume that they have no rights. That is not entirely the case.
Creditors are entitled to the following:
• If they file a proper proof of claim, they are entitled to distribution according to the status and priority of their claims in a Chapter 13 or Chapter 7 asset case. Although it is true that in most cases this may be very little or nothing, and in other cases this could be 100% of repayment.
• Creditors have the right to be heard during the confirmation of the debtor's plan (in Chapter 11, 12 or 13) or at any §341 meeting.
• Creditors can challenge the debtor's discharge for the appropriate reasons and at the appropriate time.
As a Creditor what should be done once a debtor files a bankruptcy?
1) Cease any collection activity.
Once a creditor has any indication that a debtor has filed, even if the creditor has not received official court notice, the creditor must cease and desist all collection activities. Collection activities that must be stopped are telephone calls, billing, or legal proceeding that may be pending or in collection against the debtor. In Chapter 13, the automatic stay also protects co-debtors on consumer debts unless the court has granted a §1301 Stay Lift order.
2) File a Claim with the Court.
The notice of the bankruptcy sent by the court clerk will tell you where to file a proof of claim and the deadline for doing so. File promptly as the deadlines are strictly enforced. Attach a copy of any contract or supporting documentation to your claim or a summary if your supporting documents are voluminous. The proof of claim is normally located on the backside of the notice. However, should that proof of claim form become unavailable, it is possible to get "online" from the local bankruptcy court web site.
3) Consider whether your claim is dischargeable
Certain claims are non-dischargeable in a Chapter 7 bankruptcy case. Examples are certain obligations arising in a divorce, debts incurred by fraud or willful and malicious acts of the debtor, or damages arising from drunk driving. Consult an experienced bankruptcy attorney to promptly and properly determine if your claim falls in one of these categories where you must file an adversary proceeding to protect your rights prescribed by law. For a complete list of non-dischargeable debts in a Chapter 7 see 11 USC 523.
4) Determine whether your claim is secured by the debtor's assets.
If your loan is secured by assets, then you are a secured creditor. As a secured creditor, you have specific rights to the property, which is the collateral for your claim. This can be in the form of a mortgage, purchase money security interest, or UCC-1. If you are not being paid pursuant to the terms of the agreement between you and the debtor, then it is best to retain an experienced bankruptcy attorney to bring a motion to lift the automatic stay or for "adequate protection payments" to prevent any additional losses where a depreciating asset is involved.
5) Share information with the trustee.
If you believe that a debtor's schedules are not accurate and/or complete or you have facts that may help the trustee recover additional money or assets or challenge the debtor's right to discharge, then by all mean share them with the trustee. A creditor's vigilance is one of the best deterrence to abuse of the bankruptcy system. Furthermore, creditors are entitled to question debtors in detail about their financial situation; and if further examination is required, this can be accomplished pursuant to Federal Rule of Bankruptcy Procedure 2004.
6) Monitor the progress of the case
Some bankruptcies are dismissed for the debtor's failure to comply with the all of the necessary requirements. Should you believe that this happened, you should obtain a copy of the court order from the applicable bankruptcy court and verify the dismissed status again in sixteen days. On the sixteenth day should the dismissal status still stand, then, at that time, creditors are free to pursue all collection activities pursuant to the applicable state law. (You should verify the status after at least sixteen days because it is possible for a case to be reinstated or converted in that time period. Any relevant notices of appeal should be filed with that time period as well.
On the other hand when all requirements have been met, and the case was initial describe as an "no asset" case, this can change very quickly into a "asset" case where the trustee will be paying monies to creditors that have filed a proper and timely proof of claim. Therefore, it is imperative that the court has your current address until the case is closed so that you will receive notice of any changes or the requirement to file a proof of claim.
Creditors relief from the automatic stay
As aforementioned, upon the filing of the bankruptcy petition and applicable schedules and supplements with the court, the debtor receives an automatic stay pursuant to 11 USC 362. This automatic stay stops all legal proceedings with very few exceptions. The automatic stay, however, can be removed pursuant to the proper application to the court. Furthermore, it is automatically removed as to secured debtors upon completion of a Chapter 7. However, should this situation arise, you should higher an experienced bankruptcy attorney immediately to pursue your legal rights.
Contesting dischargeability
In addition to the family support type of obligations, a creditor whose claim against the debtor was incurred by fraud dishonesty or other forms of intentional "bad acts" or which may require a non-support claim which arose in a divorce may contesting the discharge of the claim in Chapter 7 by timely filing an adversary proceeding to determine the dischargeability of the claim. Said suit must be filed within 60 day of the scheduled first meeting of creditors or the claim is automatically discharged pursuant to the above-mentioned deadline which is also called "bar date". If you hold a pre-bankruptcy judgment for fraud against the debtor, that judgment may be conclusive in an action for non-dischargeability pursuant to res judicata in the bankruptcy court. However, you still need to file the adversary proceeding or you may very well lose your rights.
Debts arising in divorce
Practical Considerations
1) Before spending the time, money and emotional energy to contest the discharge of a claim, one should consider the likelihood that the debtor will have assets or income in the future from which the claim could be paid assuming that the adversary proceeding was successful.
2) Consider the estimated cost in comparison to the size of the debt and the likelihood of success at trial and the likelihood of recovery.
3) As to dishonest acts, it must be shown at trial that "but for" the dishonest act, the debt would have not have arisen. Dishonesty about the intent to repay after a debt was incurred is not sufficient.
Do I need to file an adversary proceeding to protect my claim?
Yes. You do need to file an adversary proceeding to protect your rights if the debt arose by reason of the debts fraud or dishonesty, or if the debts are in the nature of child support or spousal support.
Non-Dischargeability and Claims of the Bankruptcy Estate
If there will be a distribution in the case, whether your claims is non-dischargeable or not, you must file a claim to share in the distribution. The proof of claim form is normally on the backside of the §341 and must be filed with the court within the time set in the applicable notice.
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