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What if your debtor files for bankruptcy?

On Behalf of | Jun 9, 2024 | Collection

When you provide goods or services on credit to others, you expect payment. After all, you need those monies to keep your lights on, along with other utilities, and pay your employees.

Most customers make prompt payments and make a full repayment. But you have likely dealt with individuals with whom you’ve made several attempts to collect what’s owed. And now you’ve been informed they’ve filed for bankruptcy. What are your options now?

You must stop collection attempts

First, when a debtor files for bankruptcy, an automatic stay goes into effect immediately, halting all collection activities. You can’t make phone calls or pursue a lawsuit until the stay is lifted or the bankruptcy case is resolved.

Suppose your debtor files for Chapter 7 bankruptcy. All of their non-exempt assets will be liquidated to pay off creditors. However, some personal debts may be discharged, so you may not recover the total amount you are owed.

With a Chapter 13 bankruptcy, the debtor proposes a payment plan to pay off their debts over an extended period of time. You may receive payments, but there is still the possibility that some debts may be discharged.

As a creditor, you must file a proof of claim with the bankruptcy court that states the amount of money the debtor owes and evidence to support your claim. If the debt is secured by collateral, such as a mortgage or car loan, you have a higher priority and are more likely to recover your debt. Unsecured debts have a lower priority and may only receive partial payment or none at all.

A meeting of creditors will be scheduled as part of the bankruptcy proceedings. During this meeting, you will have the opportunity to question your debtor about their financial situation. You may also have grounds to object to the discharge of the debt if you believe the debtor incurred the debt through fraud or dishonesty.

As a business owner, navigating bankruptcy proceedings can be complicated and challenging. Your debtor has an advocate in bankruptcy court. It’s crucial that you also work with someone who can protect your rights as a creditor and assist you in recovering your debt.