What To Do If You Are a Creditor In a Bankruptcy?


man asking holding question markMost of the posts on this blog, and in fact on most bankruptcy blogs, focus on the consumer as the bankruptcy debtor.  That makes sense–most bankruptcy cases involve a consumer debtor and a number of institutional creditors, like banks and credit card companies.  And those banks and credit card companies have in-house lawyers, and white-shoe law firms on retainer–they don’t need to read blogs to find out what to do about that bankruptcy notice they just got.  But there are times when the shoe is on the other foot–when the consumer is the creditor, and gets that bankruptcy notice.  It can be difficult, if not impossible, for a consumer in that situation to figure out what to do.

You might have gotten a bankruptcy notice from a relative who owes you money.  You may have gotten a bankruptcy notice from a former spouse who pays child support or alimony, or who is behind on those support payments.  You might get a bankruptcy notice if you have paid a deposit to a business for goods or services, or if that business has given you a warranty on an item you bought or a service you paid for.  You might get a bankruptcy notice from a gym or country club that you joined.  You might even get a notice that your mortgage company has filed bankruptcy, especially if your mortgage is held by an individual or small company.

So what should you do?  In almost all cases, the answer to that question is simple: consult an experienced bankruptcy attorney.  Will it cost you to do that?  Probably, but it could cost you a lot more if you don’t.  Bankruptcy in general, and particularly Chapter 11 bankruptcy, operates on the principle that interested parties will appear in Court and make their concerns known.  If you don’t participate in the process, the Court will assume that you aren’t being harmed by the process.  That principle may work better when the parties in question have lawyers on retainer.  But don’t make the mistake of assuming that the Court will protect your rights if you don’t take action yourself.  If you spend about ten minutes in bankruptcy court you will hear someone say the words “no one objected, Your Honor.”  It is how the system works.

Clearly, how much time and money you spend on the process will be dictated by the kind of claim you have, and how much you have at stake.  In the examples above, you may be far less concerned about a warranty that is about to expire than you should be about your mortgagor.  If you have just received a bankruptcy notice from the inn that is supposed to host your wedding in two weeks, you probably don’t need me to tell you to jump right on that so that you can formulate a plan of action.  But no matter what kind of claim you have, you need to act quickly.  Bankruptcy is also a creature of deadlines.  You have a limited time to file a claim, and may not be able to recover anything if you file late, or not at all.  You also have a limited time to file an action against an individual debtor to prevent the discharge of debts due to fraud or other bad behavior.  Lets say you bought your house from someone who owner-financed it for you, and then he took out a mortgage on your house so he can’t give you clear title even though you have made all the payments.  Now he has filed bankruptcy.  If you don’t take action very quickly, he may walk away owing you nothing.  Delay is critical in that situation, and in many others.

Even if the debtor has a plan to pay you back, you may need to take action to get paid.  In a Chapter 13 case, the debtor proposes a repayment plan, but a Chapter 13 trustee won’t distribute any of the money that the debtor has earmarked to come to you until you file a claim.  While filing the claim may be something you can do without a lawyer, it can sometimes be difficult to be certain that you have included everything the court and the trustee needs.  For example, I recently helped a gentleman who had gotten an objection to the claim he filed in a case where he was owed back payments on a lease.  He had filed the claim in the correct amount, and sent it in on time, but he didn’t know that he needed to specify the months for which payments were due.  It was simple to correct, but it could have cost him time and money if he had failed to respond.

Frankly, there are certainly situations where you get that bankruptcy notice, and consult a bankruptcy attorney, and he will tell you that there is nothing you can do.  You may not have any grounds to object, and there may be no pool of assets and no payment plan for you to make a claim against.  But, in many cases there is a way to recover at least part of what you may have at stake.  If you do nothing, you are leaving that on the table.