A debtor in bankruptcy seeks to wipe out, reduce, or change the original terms of a debt. There are several key deadlines that creditors must meet to protect their rights in a bankruptcy. So creditors receiving a bankruptcy notice should take an active role in the debtor’s case.
Automatic Stay. The filing of a bankruptcy creates an “automatic stay” of almost all collection activities. This temporary federal injunction is so broad that it even requires the creditor to turn repossessed collateral back over to the debtor.
Upon receiving a bankruptcy notice a creditor should determine whether to seek relief from the automatic stay to continue collection activities outside of the bankruptcy. The courts rarely grant relief from stay to creditors who do not have a security interest in collateral.
Meeting of Creditors. The bankruptcy notice will set a date and time for a “meeting of creditors.” Creditors are not required to attend this meeting, and most choose not to attend. Creditors who do attend are given a brief chance to ask the debtor questions about the debtor’s financial affairs.
Proof of Claim. In Chapter 7, Chapter 12, and Chapter 13 cases a creditor must file a “proof of claim” to receive a payment from the bankruptcy trustee.
Chapter 7 trustees usually make no payments to creditors. If and when a Chapter 7 trustee is likely to make payment the bankruptcy court will send out a special notice advising creditors to file claims.
Chapter 12 and Chapter 13 trustees frequently make payment, so the initial bankruptcy notice will include a claim filing deadline.
In Chapter 11 cases a creditor’s claim is automatically filed if the debtor lists the claim as undisputed. After receiving a notice of a Chapter 11 case a creditor should check the listing of the creditor’s claim and file a proof of claim if the debtor lists the claim incorrectly or shows it as disputed.
Plan. In Chapter 11, 12, and 13 cases the debtor will propose a plan. If the court confirms the plan then the plan will set new terms by which the debtor will pay (or, perhaps, not pay) creditors. So creditors should read a debtor’s plan carefully and promptly contest the plan if the terms are unfavorable.
Discharge. The bankruptcy “discharge” is a permanent injunction against creditor efforts to collect pre-bankruptcy debts. Mortgages, security agreements, and other liens ordinarily survive the discharge. So a creditor holding a discharged debt may still be able to foreclose real estate or repossess collateral.
Certain debts are automatically excepted from the discharge, others are excepted only if the creditor timely seeks a determination of the dischargeability of the creditor’s debt.
In Chapter 7 cases the debtor may voluntarily “reaffirm” a debt, excepting the debt from the discharge. To be valid, a reaffirmation agreement must meet complex statutory requirements.
Preferences. A bankruptcy trustee, or even a debtor, may ask a creditor to give back a payment received from a debtor before the bankruptcy began. The creditor may legally resist this request under certain circumstances.
Please contact us if you receive a bankruptcy notice and would like our assistance.
