A Notice of Bankruptcy is sent to creditors after one of their debtors files a petition with the court attempting to claim bankruptcy. After receiving the notice, the creditor must take certain steps to protect their interest in the money they are owed.
For example, if a debtor files a bankruptcy petition and lists their mortgage company as a creditor, the mortgage company will receive a Notice for Bankruptcy from the court. The notice will include the actions the creditor must take if they object to their particular debt being discharged.
What Happens After a Notice for Bankruptcy is Received?
When a creditor receives a notice of bankruptcy filing, they are required to stop any collection activities against the debtor. The court puts an automatic stay on actions like lawsuits, wage garnishment, and repossession of property. Creditors are not permitted to demand repayment via phone, mail, or any other means of communication. Creditors who engage in those activities anyway might be liable for actual and/or punitive damages and attorney’s fees.
If a creditor disputes a debtor discharging the debt they are owed they may have to file their own complaint or motion with the court. The Notice for Bankruptcy will include filing deadlines.
What Steps Should I Take After Receiving a Notice for Bankruptcy?
A creditor who receives a Notice for Bankruptcy must stop all collection activities. The stay protects the debtor from aggressive collections activities during the bankruptcy process, but also protects creditors. Creditors who have more resources to go after debtors, or are more aggressive, would have an unfair advantage over other creditors.
An automatic stay allows for a more orderly process and a more fair distribution of any funds that are available to pay creditors.
Creditors who do not abide by the stay might jeopardize their chances to recover the debt owed to them during the bankruptcy process. They might also face other penalties, like being required to pay damages and attorney’s fees.
Some of the collection activities that must stop upon receipt of a bankruptcy notice include:
- Directly communicating with the debtor via phone call, email, or letters.
- Sending bills to the debtor.
- Filing a lawsuit against the debtor in an attempt to recover.
- Garnishing the debtor’s wages.
- Repossessing the property associated with the debt, such as the vehicle with a car loan attached to it.
While the creditor is prohibited from attempting to collect the debt, they can take steps to secure any claim they will have to collect from the debtor during the bankruptcy proceedings, in the event there is money to distribute to creditors. The creditor should prepare and file their proof of claim with the court by the deadline stated in the bankruptcy notice. The proof of claim will include the type of debt, the amount of the debt, and any contract or supporting evidence.
In some cases a creditor might be able to ask the court to lift the automatic stay on collection activities. This is often done by secured creditors, such as mortgage or car loan companies. They allege that they are harmed by the debtor failing to make their payments during the bankruptcy proceedings.
Following the Notice for Bankruptcy the debtor will file a lot of paperwork with the court. They will document their assets, income, expenses, and debts/liabilities. Depending on which type of bankruptcy that has been filed (Chapter 7 or Chapter 13), the debtor will either create a repayment schedule or inform the court which, if any, debts they want to keep. For example, some debtors want to keep their mortgage and vehicle loan so that they can keep their house and car.
Creditors will want to review these documents to assess the debtor’s financial situation and to get an idea of how much money might be available to repay creditors who have filed a claim. Some creditors might decide against pursuing their claim due to very little available funds.
What Can I Do If I Do Not Think the Debtor Should Go Into Bankruptcy or If I Want to Collect During the Automatic Stay?
Creditors can file a motion for relief from the automatic stay triggered by the Notice for Bankruptcy. They must have good cause for making the request. For example, the debtor has no equity in the secured property (such as in the case of a house or car), so there is nothing protecting the creditor’s interest. Requiring the debtor to continue making payments protects the creditor by giving the debtor more of a financial interest in the property.
The argument can be made that discharging the debt in bankruptcy is unnecessary because the debtor has no equity and the property can be returned to the creditor. Creditors can ask to repossess the secured property in this motion.
Debtors and creditors can also attempt to come to their own agreement regarding the repayment of debts. An alternative payment schedule can help creditors get paid and help debtors avoid a bankruptcy.
What Happens If I Did Not Receive a Notice for Bankruptcy?
A creditor might not receive a Notice For Bankruptcy for one of the following reasons:
- The debtor had an incorrect mailing address.
- There was a problem with mail delivery.
- The debtor did not include all of their creditors in their bankruptcy filing.
A creditor who did not receive a Notice for Bankruptcy must file a claim with proof of the debt to be able to participate in the bankruptcy. Creditors left off of the filing might be able to sue the debtor for the fill amount they are owed.
Despite being allowed to file a lawsuit, it is quite unlikely that it is in the creditor’s best interest. The debtor’s assets will be taken and sold during the bankruptcy and the proceeds used to repay the creditors who filed claims during the process. Nothing will be left to pay a judgement if the creditor is successful in a lawsuit. The better option for creditors is to file their claim to be included in the bankruptcy proceeding.
How is Priority Determined During a Bankruptcy Claim?
After sending the bankruptcy notice to creditors, and following the debtor’s filing of paperwork detailing assets, income, and liabilities, the debtor’s assets will be used to satisfy the claims of approved creditors. The secured debts are usually the easiest to satisfy since they are tied to a physical piece of property, such as a car, house, or business equipment (like computers, copy machines, etc.). Therefore those debts usually take first priority.
Unsecured debts are satisfied next, typically according to the amount, with the lowest amounts having the lowest priority. Therefore it is important for creditors to pay attention to the filings to determine their relative priority when deciding whether to use their resources to pursue a claim for repayment.
Some debts can never be discharged in bankruptcy. These include:
- Student loans
- Child support
- Civil damages awards
Should I Hire a Lawyer?
If you are a creditor who has received a Notice for Bankruptcy, you should contact a bankruptcy lawyer. An experienced and qualified attorney can help you navigate the process and protect your financial interests.
They can advise you regarding your chances of being repaid, and assist you with filing the necessary paperwork to pursue a claim for repayment. A bankruptcy attorney can be your advocate working to protect your interests relative to other creditors.