Creditors sometimes wrongly assume that a bankruptcy notice removes the right to their claim against the debtor. This is not entirely true.
As a creditor you have the right to:
- a share in the bankrupt estate’s distribution, according to the priority of your claim
- a court hearing to determine the debtor’s plans to liquidate nonexempt assets in Chapter 11, 12, and 13 cases
- estate assets payments
- an adversary proceeding to prevent certain debts from being discharged
In a Chapter 7 case, you may also receive an equitable share of the debtor’s nonexempt assets; you have the right to be treated fairly in Chapter 11, 12, or 13 cases. If you’re a secured creditor — that is, if you have a lien on the debtor’s property — you have assurance that the debt will be paid, including any amount past due.
In no-asset Chapter 7 cases, there are no nonexempt assets, and most unsecured debts will be discharged. As a result, only creditors who hold a security take part in such cases. Under this set of circumstances, you are permitted to file a motion for relief from the automatic stay in order to facilitate foreclosure on the loans or to recuperate the property that secures the loan. A court hearing is held for this kind of motion, and there the debtor can contest the proposed action.
In a Chapter 7 asset case the trustee will, for a deductible fee, distribute the remaining assets among the debtor’s unsecured creditors. This action is based on a priority method, detailed in the Bankruptcy Code. In order to share in this eventual distribution, you as a creditor will be required to file proof of claim. Correctly filed claims are assumed to be in order and accurate; this means that you do not need to prove that you are owed by the debtor unless there is an objection.
Similarly, in cases that relate to other chapters of the Bankruptcy Code, debtors are obligated to look out for their own interests. In other words, if a creditor files a claim, it’s up to the debtor to object if they believe the claim is inaccurate.
Reaffirming the Debt
As a creditor, you also have the right to ask the debtor to honor the debt even after it has been discharged. This is known as “reaffirming the debt.” Debtors are sometimes willing to accept such terms when there is a cosigner or guarantor of the debt — such as a family member, friend, or employer — whom the debtor would prefer not to stick with the debt. A debtor may also wish to reaffirm a debt in order to avoid having a secured creditor take the collateral or as a precondition for agreeing to engage in business with you again.
Proof of Claim
Creditors most commonly involve themselves in consumer bankruptcy cases, which typically involve little to no asset, by filing a proof of claim and sharing in the proposed plan or in the liquidation of the bankruptcy estate. Unless the debtor or another interested third party objects, a properly filed proof of claim is sufficient evidence to the claims legitimacy and amount, and will be allowed.
If you’re an unsecured creditor, you will not be given a distribution from the bankruptcy estate unless a proper proof of claim has been filed. The proof of claim must be filed within 90 days of the date the meeting of creditors was first set, excluding any continuances. Be sure to check out Four Types of Business Bankruptcy for more information on this topic.