I’m sure it comes as no surprise to anyone that there have been a lot of personal bankruptcies lately. In fact, U.S. consumer bankruptcies could top 1.6 million this year. The most common reasons for filing personal bankruptcy are bad mortgage debt, credit card debt, medical bills and divorce.
All these bankruptcy filings are affecting not just the people filing bankruptcy, but also their creditors.
While most people who declare bankruptcy do so as an absolute last resort and have little or no assets left, sometimes the debtor has regular income or valuable assets that could be used to pay off a portion of the debts.
If you are owed money by someone who declared bankruptcy recently, it does not mean you have no chance of recovering on the debt. You still have options for pursuing money owed to you.
Here are the steps you should follow if you are a creditor and someone who owes you money has declared bankruptcy.
Automatic Stay Stops All Collection Activities
The first important lesson is that when a debtor files for bankruptcy protection, all collection activities must stop. That means even if you were trying to collect on a $10,000 personal loan, you must stop all phone calls, emails or direct contact to pursue the debt. However, that does not mean you cannot continue to try to get your money back through the courts. In a sense, the fight simply shifts from the streets to the courthouse.
Determine if Your Debt is Secured or Unsecured
Debt can be secured by property or unsecured, and it is treated differently in bankruptcy court if it is secured or unsecured. Chances are you already know whether your debt is secured or unsecured so I won’t dwell on this, but it’s worth asking yourself first if your debt is secured. Real estate loans and commercial equipment loans are generally secured, while credit cards or personal loans tend to be unsecured.
Is the Debtor filing Chapter 7 or Chapter 13?
There are two main kinds of bankruptcy filings which entail the majority of individual bankruptcy filings: Chapter 7 and Chapter 13. A Chapter 7 filing is a total liquidation where most of the debtor’s personal assets are sold off to pay the creditors. In order to qualify for a Chapter 7, a debtor must make very little to no income.
Chapter 13: Repayment Over Time
If the debtor earns too much money to qualify for a Chapter 7, then they generally file for a Chapter 13. A Chapter 13 filing allows an individual with substantial debts, but regular income, to file for bankruptcy protection and doesn’t automatically eliminate the debtor from eligibility. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
A Chapter 13 takes longer to finally close out. The bankruptcy trustee determines how much the debtor can afford to pay out of their salary each month, and then the debtor pays that amount to the trustee which the trustee then distributes to the creditors. The creditors usually do not get paid out the full amount they are owed – often it’s much less.
File A Proof of Claim
In order to protect your claim, you need to file a “Proof of Claim.” The deadline for filing a proof of claim varies so you want to be sure to file the Proof early to ensure you do not waive your right to your property. Creditors in Chapter 7 and 13 cases generally must file their Proof of Claim 90 days from the date first set for the meeting of creditors.
Attend the Meeting of Creditors
Shortly after the debtor’s bankruptcy is filed, the bankruptcy trustee will schedule a “Meeting of Creditors.” When I first heard this term, I thought it sounded like a very contentious meeting where a roomful of creditors show up and demand that the debtor pay them back. In reality, very few creditors ever show up. However, you may wish to attend in order to monitor the debtor’s progress.
You May Need To File An Objection to Debtor’s Exemptions
When a person files bankruptcy, they have to list all of the personal assets they have which they want to keep under specific categories of exemptions. While a debtor cannot hold on to unlimited amounts of assets, they can usually hold on to most of their personal household goods.
Often debtors think that a team of government agents are going to come into their home and cart away all of their personal items. That’s an exaggeration, but either way it really doesn’t happen. Most people who declare bankruptcy have personal items or household goods that are worth less than the amounts they can claim as exempt, meaning they won’t have to sell off their personal items or household goods.
Sometimes debtors claim significant assets as exempt by misstating their value. In fact, I once saw a debtor try to claim a small chain of profitable retail businesses as exempt because they argued that the value of the company was nearly zero. In order to protect against that from happening to you, your attorney should pour over the debtor”s bankruptcy papers to make sure there aren’t any hidden “gems” which have actual value.
If the debtor does have assets of significant value which they have tried to claim as exempt, you will need to file an objection to a claim of exemption. These objections are ordinarily due within 30 days after the conclusion of the meeting of creditors.
Filing an Objection If Debtor Filed Chapter 13 to the Chapter 13 Plan
If the Debtor filed a Chapter 13 plan, then you may want to file an objection to the Chapter 13 plan. The Chapter 13 plan will propose monthly payments to creditors over a couple of years, up to 5 years. Depending on how much you are owed and how many other creditors are owed money, you may receive payments under the plan. You probably won’t receive all of what you’re owed, but you’ll receive something.
If you are going to receive far less than what you’re owed, you may want to file an objection to confirmation. The deadline to file an objection will be determined by the local court rules, but it may be 7-14 days prior to the hearing on confirmation of the plan. You will need to do a cost-benefit analysis to ask if it’s worth the cost to file the objection.
In order for the court to approve the plan, the plan must:
1. Comply with Bankruptcy Code
A Chapter 13 plan cannot be confirmed by the court unless it contains mandatory provisions required by 11 USC Section 1322(a). A qualified attorney will be able to review the Chapter 13 plan and see if it complies.
2. Be Proposed in Good Faith
The Chapter 13 plan must also be proposed in good faith. Whether the plan is proposed in “good faith” is inherently a very fluid concept. The court will use the “totality of the circumstances” to determine if the plan has been proposed in good faith. If the debtor filed Chapter 13 petition for an improper purpose, courts ordinarily will find that the debtor’s plan is not proposed in good faith.
3. Plan Must Satisfy “Best Interests of Creditors” Test
The Chapter 13 also must be in the best interests of the creditors. The test for this is: all unsecured creditors holding allowed claims must receive at least as much as they would receive if the debtor’s assets were liquidated under Chapter 7 on the plan’s effective date.
Hearing on Confirmation of Chapter 13 Plan
The final step is the court must hold a hearing to confirm (or “finalize”) the Debtor’s Chapter 13 plan. As a creditor, you must receive at least 28 days’ notice by mail of the plan confirmation hearing.
The court will then make a decision whether to confirm the Chapter 13 plan. If the court does confirm the plan, then it is binding on the debtor and all creditors.
Finally, although this article is designed to be helpful to any creditor who is trying to collect money through the bankruptcy courts, I strongly recommend you hire a qualified attorney with experience handling bankruptcies if you have substantial debt. The bankruptcy code is tremendously complex and constantly changing, and many attorneys specialize in just this area of law in order to keep up on all the developments. It is generally not a good idea to try to represent yourself as a creditor in bankruptcy court due to all the complexities.
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