Law Office of Rick Morin

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How To Participate In A Bankruptcy As A Creditor

If you have lent someone money and that person declares bankruptcy, what do you do next? Creditors have certain rights during the bankruptcy process, but creditors also have to follow very specific rules. Here are some tips that will help you as a creditor in a bankruptcy.

1. Pay attention to deadlines

When you receive notice from the United States Bankruptcy Court that your debtor has declared bankruptcy, you will be given a series of dates. There will be a date for the Meeting of Creditors and several deadlines for objections to the bankruptcy.

In Chapter 13 bankruptcies or Chapter 7 bankruptcies in which assets will be liquidated, there is another deadline for filing a Proof of Claim.

Deadlines in the bankruptcy world are hard and fast. Miss a deadline and you could miss out on an opportunity to get paid some or all of your debt.

2. Make sure to file a Proof of Claim

If you receive notice from the Bankruptcy Court that creditors will receive a distribution of funds, make sure that you timely file a Proof of Claim.

A Proof of Claim tells the Court how much money the debtor owes you and why. The Court will use the Proofs of Claim to determine which creditors receive distributions and in what order.

Failing to file a Proof of Claim means that you will not receive any funds from the debtor.

3. Not all debts are treated equally

The court does not treat all debts the same. There are unsecured debts, secured debts, priority debts such as domestic support obligations, taxes, lawsuit judgements, etc.

If you have a special type of debt, it makes sense to consult with a qualified bankruptcy attorney to make sure that your rights are being preserved. For instance, if the debtor obtained debt from you through fraud, you might be able to petition the court for a ruling that says that your debt will not be extinguished by the bankruptcy. Failing to take the appropriate action will result in this non-dischargeable type of debt being discharged.

4. Watch out for large pre-petition payments from the debtor

This is one area that can be ugly. Imagine that the debtor has been trying his or her best to repay their debt to you but then decides to declare bankruptcy. In the 90 days prior to filing, pretend that the debtor paid you half of their $10,000 obligation. The $5,000 that they paid before declaring bankruptcy is known as a "preferential payment."

In some cases, the bankruptcy trustee can demand that you return the preferential payment or payments. They will then take that money and distribute it equally among all unsecured creditors. If you don't turn over the money, the trustee can sue you in the bankruptcy court!

While this might seem like insult added to injury, the bankruptcy code is set up to ensure that all creditors are treated as similarly as possible.

If you have received notice of a bankruptcy case involving a debt owed to you, contact Sacramento Attorney Rick Morin at (916) 333-2222 for professional advice on how to proceed and protect your rights.