Creditor Rights in Bankruptcy

I received a Notice of Bankruptcy Case, Meeting of Creditors, & Deadlines. What does this mean?

When a debtor files for bankruptcy, the bankruptcy clerk’s office automatically sends the Notice of Chapter 7, 11, 12 or 13 Bankruptcy Case, depending on what chapter of bankruptcy the debtor filed, to all creditors listed by the debtor. You received this notice because either the debtor owes you money or you have a claim or potential claim against the debtor. It contains important information regarding the 341 meeting of creditors and deadlines that are critical to the case. Contact a bankruptcy attorney immediately to protect your interests.

Will I get my money back from the debtor?

It depends.

Debtor filed Chapter 7 bankruptcy

In Chapter 7 bankruptcy, there is either an “asset” case or a “no asset” case. When a debtor files for bankruptcy, she is entitled to keep a certain amount of assets, known as exemptions. If debtor has assets beyond the exemption limit, the trustee will liquidate the assets and distribute it to the creditors. Such case would be considered an asset case. If there are no assets beyond the exemption limit, the creditors will not receive any money.

In an asset case, you will receive a Notice of Possible Dividend. This is the trustee’s way of informing the creditors that there may be money available to pay the creditors. It’s important that you complete the Proof of Claim. The Proof of Claim is like a reimbursement request. If you do not complete it, you will not be paid.

When completing the Proof of Claim, you must attach documents to support your claim. There is very specific rules about information you must include and information and that you must redact.

Debtor filed Chapter 13 bankruptcy

In Chapter 13 bankruptcy, debtors are required to make payments for typically 3 or 5 years. The amount of her payment depends on several factors including her disposable income (amount left over after necessary expenses), liquidation analysis of debtor’s assets and types of debts, such as priority claims, arrearages, and secured claims.

Similar to an asset Chapter 7, you must complete the Proof of Claim in order to get paid. Unlike a Chapter 7, in Chapter 13 the debtor prepares a plan that explains how much will be paid to each type of creditor.

How much money will I get back in an asset Chapter 7 or Chapter 13?

It depends. In an asset Chapter 7, the trustee deducts her commission and any professional fees (such as her attorney fees, accountant fees and others) before distributing any money to the creditors. Whatever amount is leftover will be distributed to creditors by their priority. If unsecured creditors, such as credit card and unsecured personal loans receive part of the payment, they are paid pro rata. Meaning, if your claim consists 10% of the total claim paid to all unsecured creditors, you will receive 10% of the net amount i.e., ten cents on the dollar.

In a Chapter 13, the debtor proposes to pay certain amount each month, and must explain how much is being paid to each type of creditor. How much you are paid is a product of the debtor’s income, expenses, assets, other debts and other factors. The same priority and pro rata structure that applies in Chapter 7 applies to Chapter 13.

I have a lien against the debtor. How is this treated in bankruptcy?

It depends. If you have a judgment, the underlying debt may be discharged so your judgment can be meaningless. However, if you obtained a lien on your judgment or have another type of lien (such as a UCC lien), you may be in a superior position.

If there is an asset Chapter 7 or debtor files a Chapter 13, your lien entitles you to priority over many other creditors, meaning you get paid before most other creditors. Moreover, if you have a special kind of debt that is not dischargeable, plus a lien, you are placed in a stronger position to collect in the future.

What is the 341 hearing and do I have to attend?

The 341 hearing, also known as meeting of creditors is where the debtor meets with the trustee and any questions the trustee has. Creditors also have the right to attend the meeting and ask questions. If you do attend the hearing, you will be given a few minutes to question the debtor. Typically, these hearings are very brief (lasting less than 15 minutes).

There are other methods for questioning the debtor in more depth if needed.

What can or can’t I do while the debtor is in bankruptcy?

When a bankruptcy is filed, there is an automatic stay that goes into effect. Think of the Automatic Stay as a protective bubble for the debtor. While the automatic stay is in effect, most creditors are prohibited from any collection efforts. This includes calling the debtor, writing the debtor, showing up at his house, going to recover your property, etc. There are some exceptions to the stay, including actions to enforce collecting domestic support obligations (DSO) such as child support.

Violating the automatic stay can have serious consequences. You may find yourself faced with a proceeding where the debtor seeks to recover damages against you for violating the automatic stay.

In certain instances, you may be able to ask the court for relief from the automatic stay which will allow you to continue certain actions such as proceeding with a lawsuit or recovering secured property.

The defendant filed for bankruptcy in the middle of a lawsuit. Can I continue the lawsuit?

Typically not. The lawsuit is likely stayed by the automatic stay. However, some proceedings such as criminal prosecutions are not stayed. If the debtor is represented by insurance, you may be able to proceed against the insurance proceeds.

The trustee sent me a letter or sued me, demanding money I received from the debtor. Can the trustee do this?

Yes. The trustee has many powers under the Bankruptcy Code, particularly Chapter 7 trustees. Money paid to you in the 90 days before debtor filed is potentially a preference. If you are a family member or business associate, this deadline extends for at least one year. In cases of fraud, the ability of the trustee to recover such transfers of money or property can extend for several years, depending in part what state court fraud statutes apply.

The debtor is demanding money I received from a judgment lien where I garnished wages or swept a bank account. Can the debtor do this?

Yes. If you recovered funds from the debtor within 90 days of filing the case, the debtor can bring an action against you to recover these funds in certain circumstances.

Is there anything I can do to recover my money?

Under certain circumstances you may be able to bring an adversary proceeding against the debtor. This is an adversary proceeding where ask the court to deny the debtor’s particular debt owed to you. An adversary proceeding is a lawsuit within bankruptcy. 11 USC § 523 of the bankruptcy code lists exceptions to discharge. Debts that cannot be discharged include debts from fraud, embezzlement, child support, willful and malicious injuries among others. A total denial of the discharge of all debts can be found under 11 USC § 727. Reasons under 727 includes debtor knowingly and fraudulently making a false oath concerning the bankruptcy and abusing the bankruptcy process. A 727 action is the “death penalty” of bankruptcy where a debtor is thrown out of the bankruptcy process entirely.

Issues involving creditors in bankruptcy is very complicated. This post is meant to be a guide and overview of the common issues. Please call us at (415) 963-4004 to schedule an appointment to discuss the details of your specific case.