After a bankruptcy petition has been filed, the creditors’ rights change significantly. One of the first steps taken by the bankruptcy court is to file an Automatic Stay, which is basically a court order that prevents creditors from taking any additional steps in an attempt to collect the debt. At this point, the creditors are left to participate in the legal process and follow the procedures and guidelines set out by the court and the law.
Once again, creditors’ rights will depend on the nature of the debt. If it’s a secured debt, the creditor can be quite involved in making sure that either the debt is repaid or the property is recovered, almost regardless of the type of bankruptcy involved. However, there are exceptions, and this involves the situations where there are several secured creditors attached to one piece of collateral.
In terms of unsecured creditors, their role will depend largely on the type of bankruptcy that’s been filed. If the debtor files under Chapter 11 or Chapter 13 of the United States Bankruptcy Code, the creditors can be involved in approving or challenging the proposed repayment plan such that it’s as satisfactory as possible under the circumstances. This input is in addition to the legal options present for creditors in Chapter 7 filings, which are discussed below.
If the case is a Chapter 7 filing, the creditors do not have many options. Generally, a creditor should file a notice of claim with the court after receiving notice from the court that the case has been filed. Creditors can also move to lift the Automatic Stay if certain conditions such as fraud are believed to be afoot. In addition, creditors can move to avoid the discharge of the debts owed to them if they can convince the court that the debtor incurred the debt by fraudulent means.
The most common example that leads to these remedies being successfully obtained include the debtor obtaining a credit card shortly before filing for bankruptcy and then charging large amounts of debt with no intent to repay it. Fraud can also be proven if the creditors can show the court that the debtor has hidden assets or has not fully disclosed his or her financial situation in some way.