It is not an uncommon problem. You go after a client, customer or vendor for payment, and they avoid or delay. Next thing you know they are filing for bankruptcy. Are you out of luck? Not necessarily. The following tips can help creditors improve their chance of obtaining payment when dealing with a debt that is part of a bankruptcy case.
#1: Know the rules of the automatic stay
It is helpful to understand how the automatic stay works, as a failure to follow the rules can come with serious consequences. Once the court approves the debtor’s petition for bankruptcy a court order known as the automatic stay goes into effect. If the debtor listed your debt as part of the bankruptcy case, you will receive notice from the court with the details of this order.
This court order requires all creditors stop any attempts to contact the debtor for payment. All phone calls, mailings, text messages or other attempts to reach out need to stop.
#2: Know the difference between dischargeable and nondischargeable debt
The exact details of the bankruptcy will depend on various factors, including the chapter or type of bankruptcy used by the debtor. However, one of the foundational goals of bankruptcy that almost always applies in some form is the debtor’s attempt to remove, or discharge, certain debts. This allows the debtor to pay off some debts and move on after the bankruptcy is complete.
But which debts are dischargeable, and which are not? In most cases, certain debts like those related to taxes, a divorce or fraud are not dischargeable. After the court determines which debts are dischargeable and which are not, it will decide which creditors should be paid, in order of priority, and how much they are entitled to receive. In some cases, this amount could be zero if the debtor has insufficient assets.
In Ch. 11 and 13 bankruptcies, the court may approve a repayment plan for the debtor. As a result, even creditors that have dischargeable debt may qualify for recovery. In other cases, a secured creditor, with court permission, can foreclose on and sell its collateral.
#3: File a claim
The court generally sends creditors a notice explaining that the debtor is in bankruptcy. This notice includes information like the details of the rules of the automatic stay, noted above, and information about how to file a proof of claim with the court. This proof of claim allows you to establish that you have a claim to the debtor’s assets and that the debtor owes you a debt. The rules for filing must be followed and have a strict deadline. Failure to file by the deadline generally bars a creditor from participating in any distribution.
These are just some general tips regarding the bankruptcy process. An attorney experienced in this area of commercial collections law can review your case and discuss your options to improve the chances of a recovery.