A person files for bankruptcy to gain control of their financial life. Often people and businesses find themselves over their head in debt with no foreseeable means to pay off their bills. For these individuals and companies, there are laws in place that will allow for the filing of bankruptcy. Filing bankruptcy means if the court approves their request to submit, creditors have to stop contacting them for unpaid balances. This process may sound unfair to you as a creditor.
What Are Your Rights as a Creditor?
A creditor during the bankruptcy proceedings is a person or business with the right to payment or other remedies from the party who is filing bankruptcy. As a creditor, you have rights, issues, and problems that need to be heard and addressed during these proceedings. Many times, after a creditor receives notice the party owing them money is filing for bankruptcy; they assume they no longer have the ability or right to collect what is owed to them.
This assumption is a mistake as you do have rights:
You may get a share of the distribution from the bankruptcy estate depending on the priority of your claim.
You have the right to challenge the attempts made by a debtor to dismiss your particular debt.
You, along with your attorney, have the right to be in court during the proceedings and be heard regarding matters related to the debtor’s plan on liquidating non-exempt assets.
What Action Should I Take as a Creditor When I Learn a Debtor Filed Bankruptcy?
When one of your debtors, or someone who owes you money, give notice they have filed bankruptcy; you need to:
- Stop your collection action. Once you have received notice that your debtor has filed bankruptcy, you have received a federal court injunction that prevents you from pursuing your claim to the money they owe you. You are only allowed to make further attempts through the bankruptcy court. If you knowingly violate that injunction, you could end up owing money instead of your debtor.
- You must file the proof of claim you received from the court clerk. It is essential you know the deadline for submitting as this date is strictly enforced in bankruptcy court.
- Depending under the chapter of bankruptcy filed, you will have to learn whether your debt is a priority of payment
- Learn whether or not the debt owed to you can be discharged or not. Contact an experienced attorney who is familiar with the bankruptcy court. An attorney familiar with these proceedings will protect your rights and understand the category of your claim. Ask the attorney if it is possible to file an adversary proceeding to preserve your claim even after the bankruptcy. You can find a list of debts which are not dischargeable in Chapter 7 bankruptcy hearing in 11 U.S.C. 523
- Determine if the debtor has enough assets to cover your claim
- If you feel the debtor has transferred or concealed some of their assets, you can contact the trustee who may be able to help you recover some of your money if this is the situation
- Keep track of your case. There are times a bankruptcy case will get dismissed as the debtor fails to comply with current legislation. If this occurs with your case, you are free to resume your collection process according to California law. There are also cases that start as ‘no asset’ and as they progress, they are turned into ‘asset cases’ from which dividends will be paid and could include yours.
An experienced bankruptcy attorney should be working with you through this legal process. Having someone on your side who understands the laws and court system will be your best defense when trying to obtain the money owed to you as a creditor in bankruptcy court.
Chapters of Bankruptcy and How They Influence You as a Creditor?
There are three chapters of bankruptcy that are used most often by debtors. These include Chapter 7, 11, and 13. The difference in them is how your debtor’s bills are going to be organized and how they will be required to repay you- the creditor.
Chapter 7 bankruptcy is one of the simplest and most common forms of bankruptcy. If your debtor has assets that are not protected by an exemption, a court-appointed trustee will be able to sell their assets to earn the funds owed by them. The trustee will distribute the monies collected from the sale of the assets according to priorities set by the Code.
The process of selling the debtors assets gives the debtor a discharge of their liability for most of the debts they owe. It is common for Chapter 7 bankruptcy that the trustee can close the case without selling any belongings of the debtor.
If you are one of the creditors who has a debtor filing Chapter 7, you will be allowed to question your debtor during the ‘first meeting of creditors’ or known as 341 meeting. At this meeting, the trustee will question your debtor about their liabilities and assets while they are under oath. Check with your attorney about attending this meeting with you. An experienced attorney will know which questions you should ask and which answers provided by your debtor are relevant to your case.
Basically, after the 341 meeting, your debtor only has the responsibility of cooperating with the trustee to provide information requested and to complete an education class required by law for debtors. The liens on assets are not discharged when a debtor goes into bankruptcy. A schedule will be created and includes a ‘statement of intentions’ which declares what your debtor intends to do concerning secured debts.
The ‘statement of intentions’ means your debtor will be expected to act on their intentions. These intentions include returning, redeeming, or reaffirming property that is collateral for secured debts.
Chapter 13 bankruptcy is a more powerful, yet flexible bankruptcy. Each district handles this form of bankruptcy differently, so it is to your benefit to seek legal representation if your creditor has filed a Chapter 13 bankruptcy. An experienced legal counsel will help to ensure the monies owed to you as one of the creditors will be presented and considered in court reasonably. During this process, you want your creditor’s rights protected.
Under this bankruptcy, unless they select otherwise, your debtor will keep all of their assets and be granted a discharge of their debts at the end of the case. Your debtor will propose a payment plan determined by the application of the ‘mean test.’ You will receive a copy of this plan. The formula used in the means test might end up showing there is no payment needed to be made to general unsecured creditors.
Check with your bankruptcy attorney and learn how the debt owed to you will be classified. Learn if the monies owed to you will be considered secured or unsecured. The classification of the debt owed to you will make a significant difference in the outcome of a bankruptcy ruling.
The plan created by the ‘mean test’ has to be put out by your debtor in good faith and meet two tests:
Best Interest of Creditors Test defines that your debtor will be required to pay the smallest amount allowed to their non-priority creditors.
Best Efforts Test which means your debtor must provide their creditors an amount equal to the debtor’s monthly disposable income. The disposable income amount will appear on line 58 of Form B22C multiplied by 36 or 60 depending on their income and where it falls on the state median.
Priority claims must be paid in full according to the plan and provide payment of the value of secured claims over the life of the plan. The amount your debtor will be required to pay to unsecured creditors is the largest of these:
The hypothetical amount that would have been distributed by Chapter 7
The determined amount of disposable income determined by the means test
The amount needed to pay the priority claims in full
A Chapter 13 bankruptcy is known as a reorganization bankruptcy as it will give your debtor three to five years to pay off their debts. This bankruptcy is often seen as a grace period to pay off debts, and once the grace period is over, remaining debts will be discharged.
Chapter 11 bankruptcy is also called a reorganization bankruptcy and is available to partnerships, corporations, and individuals. Unlike Chapter 13 bankruptcy, Chapter 11 has no limits on the amount of debt. This form of bankruptcy is usually the first choice used by large businesses so that they can restructure their debt. If the debt owed to you is from a company, and they have filed Chapter 11, it will be in your best interest having a bankruptcy attorney protecting your creditor's rights.
Creditors and shareholders can support or oppose actions taken by their debtors under Chapter 11 when those actions require bankruptcy court approval. Your attorney will be best at advising on those actions and whether or not they may affect the debt owed to you. The bankruptcy court accepts input from creditors in deciding how to proceed on decisions that will connect to the proposed Chapter 11 plans.
Chapter 11 is different from Title 11 which covers all types of bankruptcy, this form of bankruptcy is a particular kind and found within Title 11. The debtor will remain in possession of their assets and continue to operate their business with court supervision and for the benefits of the creditors.
Should the debtor display any form of ineffective or less than honest transactions, the court can appoint a trustee. A committee comprised of creditors is typically established by the U.S. Trustee and will include some of the largest, unsecured creditors, who are not considered to be insiders. This committee will represent all creditors and provide insight into your debtor’s business operations.
Chapter 11 is a very flexible form of bankruptcy and one of the most expensive for the debtor. The success rate of this form of bankruptcy is meager and contains some very complex regulations and rules. If the party or company that owes you money has filed a Chapter 11 bankruptcy, as a creditor it would be in your best interest to seek legal representation to ensure your claim is filed correctly.
Chapter 12 is a subset form of bankruptcy and can only be used by farming families or fishermen families. This Chapter was created as a response to difficulties suffered by fishing and farming families in the 1980s. Chapter 12 is a lot like Chapter 13 but provides more flexibility for debtors to make periodic payments. The repayment plan established is allowed to be set for three to five years. This bankruptcy is less complicated and less expensive.
What is a Trustee and How Does Their Role in Bankruptcy Court Affect My Creditors Rights?
Primarily, the court trustee’s role has been created to protect your creditor’s rights. The United States Trustee Program, part of the Justice Department, appoints the individual court trustees who make decisions over particular bankruptcy proceedings. This program was created to ensure the integrity of the bankruptcy system across the country, and their duties include:
- Making sure there is compliance with the Bankruptcy Code concerning information spread throughout the cases in regards to schedules, disclosure statements, reports, reorganization plans, and other statements or information filed during a bankruptcy
- Monitoring bankruptcy cases and making sure there is no fraud or abuse which would indicate criminal activity is occurring. If any illegal activity is found, the trustee will refer it to the U.S. Attorneys for prosecution
- Appoint and supervise private trustees who are responsible for collecting and disbursing funds to creditors under Bankruptcy Chapters 7, 12, and 13
- Reviewing applications fees of professionals such as attorneys and accountants who serve in Chapter 11 bankruptcy reorganization cases
The United States Trustee is not the same as the case trustee. United States Trustees are employed by the Department of Justice and oversee bankruptcy cases but are not involved in the daily bankruptcy process. They will appoint the court trustee presiding over your debtor’s bankruptcy proceedings.
The trustee assigned to the day to day process of cases is appointed to the task of determining whether or not the debtor has assets to liquidate to cover their outstanding debts. The trustee also reviews claims of exemption and debtor’s right to discharge. The trustee is a representative for the group of creditors. The trustee is not an employee of the U.S. government; the United States Trustee office is responsible for appointing them.
What is a Debtor’s Discharge and How Will it Affect My Creditor’s Rights?
A debtor’s discharge means the court has declared certain debts owed by your debtor are no longer going to be paid. The specific debts that are discharged are forever unenforceable. When the court has discharged your creditor’s debts, it means their slate has been wiped clean in regards to having to pay back amounts owed by them.
If your creditor has had the debt owed to you discharged, it will remove any creditor’s rights you had of collecting from them. Discharge from the bankruptcy court is a permanent order prohibiting you from attempting to receive any monies owed to you by your creditor. Contact a bankruptcy attorney to file an adversary proceeding or motion depending on the debt owed to you.
You have the right, as a creditor, to object to a debtor’s discharge of your claim. You and your attorney can file a complaint in an adversary proceeding if the discharge is the result of a criminal or dishonest act purposely designed to deprive you of money owed to you. You are also entitled to dispute the discharge of your claim if the debtor has had a discharge in a previous matter and therefore not entitled to another. Other objections can be brought to the court’s attention for dismissing a discharge of debts including:
- If your debtor transferred property or titles to another to avoid including it in the bankruptcy
- Your debtor destroyed documents or property
- There was a failure of obeying any lawful order set down by the court
- Your debtor was found to have lied to the judge or trustee during the hearings
- Your debtor gave false information on any bankruptcy schedules or petitions
Your debtor’s bankruptcy case could be dismissed if they are found guilty of any of these conditions. Talk to an attorney familiar with bankruptcy proceedings to discover where your creditor’s right’s fall in seeking compensation from a bankruptcy discharge. Bankruptcy regulations and rules are involved, and you will need an attorney familiar with the laws and who has experience in the courts to ensure what you are due is protected through this process.
Does Attending the 341 Meeting Protect my Creditor’s Rights?
You do not have to attend the 341 Meeting as it is mainly a fact-gathering event. Check with your bankruptcy attorney to receive advice on whether this meeting will benefit your case. This meeting is a time when you or your attorney can ask questions under oath regarding the debts and assets of your creditors business. Your attorney will know if this meeting will benefit your case in regards to finding answers you may want.
Payment and allowance of your claim will not be tied to the 341 meeting; however, applications must be filed by the time of this meeting and established by the court. The trustee will need to have a record of your claim to pay them. As a creditor, you may not be treated equally in a bankruptcy court. While you may be entitled to share in payments from the estate, you may need an experienced attorney to protect those rights.
Where Can I Find a Los Angeles Bankruptcy Attorney Near Me?
When a debtor seeks protection under the Bankruptcy Code, you will need an experienced and aggressive bankruptcy attorney in Los Angeles on your side. Call (424) 285- 5525 today and speak with an attorney to protect your creditor’s rights.
