Creditors' Rights in Bankruptcy

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What Is Bankruptcy?

Bankruptcy is a legal proceeding which allows a debtor to obtain a discharge from some of his debts. This leaves many creditors wondering if they’ll ever be able to recover what is owed to them.

How Can a Creditor Recover If a Debtor Files for Bankruptcy?

Creditors do have some protections when a debtor files for bankruptcy. As a condition to getting some debts discharged, the bankruptcy system requires that a debtor pay off as many debts as possible. Thus, creditors have a right to get a portion of whatever is distributed from a bankrupt estate. Whether or not a creditor will recover mainly depends on what priority the creditor’s claim has.

What Determines the Priority of a Claim?

The claims with the highest priority are secured debts. Secured debts are debts that have collateral attached, such as a car or a house. The reasoning is that if collateral exists, that collateral can be used to pay off at least a portion of the debt, if not all.

The claims with the lowest priority are unsecured debts. Unsecured debts have no collateral attached, such as credit card debt, and most bills. Creditors with unsecured debts may receive little or no payment if the debtor declares bankruptcy.

Additionally, some debts have such a high priority that they can never be discharged and even survive bankruptcy. These include student loans and child support payments, among a few others. A bankruptcy lawyer should be able to help you determine if a debt is dischargeable or not.

What Should I Do as a Creditor When I Receive a Bankruptcy Notice?

If you are a creditor and you receive a bankruptcy notice, you should immediately stop all collection activities. This includes phone calls, billing actions and lawsuits related to the debt. You should then file a claim with the bankruptcy court. The deadlines for filing tend to be short and are strictly enforced, so if you are a creditor you should act quickly in order.

Do I Need an Attorney?

If you are a creditor and have just received a notice of bankruptcy, you should contact an attorney. A lawyer will be able to tell you whether your debt is secured or unsecured, what you are likely to recover, and if you decide to file a lawsuit an experienced attorney will be able to help you file your lawsuit in a timely manner.

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Last Modified: 05-14-2014 01:45 PM PDT

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