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Creditors' Rights in Bankruptcy
Bankruptcy is a legal proceeding which allows a debtor who is unable to pay off all of his or her debts to get some of them discharged, that is, their legal obligation to pay those debts is removed. This leaves many creditors wondering if they’ll ever be able to recover what is owed to them.
Creditors do have some protections when a debtor files for bankruptcy. The bankruptcy system, as a condition of getting debts discharged, requires debtors to pay off as much of what they owe as possible.
Creditors have a right to share in any distribution from the bankrupt estate. Whether or not they will recover largely depends on the priority of the claim. Secured debts (debts with collateral, such as a car or house, attached) are the highest priority, since the collateral can often be used to pay of at least part of the debt. Unsecured debts, such as credit card debt and most bills, are the lowest priority. Such creditors may receive little or no payment.
Certain debts survive bankruptcy, and can never be discharged. These include student loans and child support payments, among a few others. A bankruptcy lawyer should be able to determine if a debt is dischargeable or not.
When a creditor receives a notice of bankruptcy, they should immediately cease all collection actions. This includes phone calls, billing, and lawsuits related to the debt. They should then file a claim with the bankruptcy court. The deadlines for filing tend to be short, and are rigidly enforced, so the creditor should act quickly.
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