Bankruptcy law is a balancing act between the rights of the debtor and his creditors. The presumption is that the debtor receives a discharge of debts and a fresh financial start – but that is not the end of the story. When you receive a notice of bankruptcy filing, you have rights and responsibilities. You may even be entitled to receive some or all of the money owed by the debtor.
The first and most important thing for a creditor to know is that a bankruptcy filing (generally) imposes an automatic stay against collection actions against the debtor. This is a court-ordered injunction that stops garnishments, harassment, and legal processes. If you choose to ignore the stay order, you may be penalized with contempt of court by a federal bankruptcy court judge. This may include a fine, an order to pay attorney fees, or other penalty. Consequently, the best (and safest) thing a creditor can do after receiving a notice of bankruptcy is to immediately stop all collection activity.
The second important thing is to consult with a bankruptcy attorney. Just because the automatic stay is in place does not mean that your hands are completely and forever tied. On the contrary, you may be able to collect from property securing a debt, or you may be able to obtain relief from the court order in order to proceed in your collection efforts (commonly called “lifting the stay).
As a creditor you will receive notices about the debtor’s case. You are also entitled to attend court hearings and invited to the debtor’s meeting of creditors. Most creditors do not attend this meeting even though it can be a valuable source of information. In a bankruptcy case in which funds are paid to unsecured creditors, such as many Chapter 13 cases or Chapter 7 asset cases, you must file a proof of claim in order to have a chance at receiving payment from the bankruptcy trustee.
A creditor may object to the discharge of his debt, or to the debtor’s discharge entirely. The Bankruptcy Code lists situations when a debt may be excepted from discharge (for fraud, for example), but the creditor must file an complaint objecting to the discharge of the debt before the bankruptcy court’s deadline, or the debt will be included in the debtor’s discharge.
In extreme cases of debtor dishonesty, a creditor can ask the court to deny the debtor a discharge of all debts. This usually involves the cooperation of the bankruptcy trustee (and the Department of Justice, the FBI, and often the IRS). If you suspect the debtor is engaged in bankruptcy fraud, hiding assets or simply not telling the whole story, you should contact the bankruptcy trustee and discuss the situation.
Creditor vigilance and obtaining representation is the appropriate response to a notice of bankruptcy filing. For the honest but unfortunate debtor, the creditor may be out of luck. However, if there are assets available for distribution to creditors, the vigilant creditor will get paid while inattentive creditors do not.