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What’s next for creditors after receiving a bankruptcy notice?

On Behalf of | Dec 7, 2023 | Firm News |

A bankruptcy notice signifies that a debtor is now under legal protection. The automatic stay (essentially, an  injunction) goes into effect, halting creditors from pursuing any collection efforts for outstanding debts, including phone calls, lawsuits or mail. However, this does not imply that the creditor can no longer recover their dues. They can still file a motion with the court, but timing is of the essence in these situations.

Reviewing the bankruptcy notice

When the debtor (anybody who owes you money or against whom you have any time of claim) files a bankruptcy petition, creditors (including claimants) should receive a notice containing crucial details that can guide their next steps. The notice provides the debtor’s and the debtor’s attorney’s contact information, the date of filing, the date of the Meeting of Creditors and most importantly, the due date for filing a Proof of Claim.

The Meeting of Creditors, also known as a 341 hearing, is not mandatory for creditors to attend, and many do not. Still, it can be an opportunity for creditors to raise any relevant questions to the debtor.

Meanwhile, creditors must note the deadline for filing a Proof of Claim. Creditors can use this form to collect the money owed to them from a bankrupt debtor. But they risk waiving their claim if they fail to file by the due date. It is imperative to proceed cautiously, as incorrect filing due to errors may invalidate a claim.

Consider whether to pursue the debt

Some debts become dischargeable in bankruptcy, meaning the debtor will no longer have to pay for them. However, some obligations cannot be eliminated through bankruptcy, such as debts incurred throught fraud, student loans, certain taxes, personal injury debts, child support and alimony. If this is the case, creditors must timely file an Adversary Proceeding to establish that the debt owed is not dischargeable.

Another difficulty with chasing a debt is that creditors are paid based on the priority and status of their claims. Are you a secured or an unsecured creditor? Secured creditors have collateral backing the debt, giving them a better chance of obtaining relief from the automatic stay. If relief from the stay is granted, they may resume efforts to realize on the collateral regardless of bankruptcy.

Meanwhile, unsecured creditors face the burden of meeting numerous deadlines and procedures as well as the cost of debt recovery.

Exploring your options

Bankruptcy proceedings are undeniably tedious and time-consuming for creditors. Nonetheless, there is hope; they still have a chance to recover debts. With a proper understanding of the legal procedures, creditors can assert their right to receive payment.