When a debtor files for bankruptcy, it can be frustrating and financially challenging for creditors. Businesses owed money may understandably worry about their ability to recover outstanding debts and what legal options remain available.
Yet, while bankruptcy can limit collection efforts, creditors still have rights under federal and Florida law. Understanding these rights can help businesses navigate the collections process more effectively and maximize potential recovery accordingly.
Creditor considerations
As soon as a debtor files for bankruptcy, an automatic stay goes into effect. This court order temporarily halts most collection actions. Violating the automatic stay can result in legal penalties, so creditors must be cautious when attempting to recover debts. However, creditors can petition the bankruptcy courts to lift the stay under certain circumstances, such as when a debtor is engaging in fraud or failing to protect secured collateral.
The type of debt owed determines a creditor’s rights in bankruptcy proceedings:
- Secured creditors – Businesses with collateral-backed loans (such as mortgages or vehicle loans) have a stronger position. They may be able to reclaim their collateral or negotiate repayment terms through the bankruptcy process.
- Unsecured creditors – Businesses without collateral (such as credit card companies, suppliers and service providers) must typically rely on repayment through the bankruptcy court’s distribution of assets.
With that said, even these rights vary depending upon the chapter of the U.S. Bankruptcy Code a debtor chooses when they opt to file.
Ultimately, while bankruptcy can complicate debt recovery efforts, creditors who act strategically and understand their rights can still maximize their chances of collecting what they are owed. Seeking legal guidance is a good way to get started.