The Creditor's Place in the Bankruptcy Process
The point of bankruptcy is to give the debtor a chance at a fresh start, but that doesn’t mean that creditors aren’t entitled to try and collect what’s owed to them. This article will look at what creditors in bankruptcy can do to maximize their rights.
Limits of the Automatic Stay
The automatic stay is one of the most powerful tools the bankruptcy debtor has at his disposal. It stops collection efforts dead in their tracks and punishes those creditors who persist by fining them. However, the automatic stay is not absolute. There are several actions which the automatic stay will not stop. These include:
- Actions to collect child support or determine paternity.
- Actions to collect alimony.
- Criminal proceedings filed against the debtor.
- Evictions from residential rental property if the eviction order has already been signed.
- Suspension of driver's licenses.
- Suspension of professional licenses.
- Assessments of taxes or audits.
Types of Debts
A creditor’s chances of being repaid often depend on the type of debt they are trying to collect. A general rule is that creditors have a better chance of getting repaid for a secured debt than for an unsecured debt. A secured debt is a debt in which the creditor maintains some kind of interest in the property at issue. A mortgage is a secured debt because the creditor maintains an interest on the house. A car loan is a secured debt because the creditor maintains an interest in the automobile. Unsecured debts are those where credit is extended without taking any collateral to secure that credit. Credit card debt is probably the most common type of unsecured debt.
If a creditor has an unsecured debt in bankruptcy, they will be repaid when the property in which they have an interest is sold, assuming that selling the property factors into the repayment plan or Chapter 7 liquidation. If the creditor has an unsecured debt, they stand much less of a chance of collecting on it.
Dismissing a Bankruptcy Case For Fraud
Sometimes, debtors make mistakes when they file for bankruptcy. Whether intentional or not, these mistakes can provide grounds to try and get the case dismissed or to exempt a certain debt from the protection of the automatic stay. Some of the most common reasons for attacking a bankruptcy case include:
- Preferential Transfers. If a debtor transferred assets to a creditor within 90 days before he filed for bankruptcy and as a result that creditor is better off than they would have been under Chapter 7 bankruptcy, the transfer is deemed a preferential transfer. The court assumes that preferential transfers are done to give certain creditors an unfair advantage over other creditors, and the bankruptcy trustee can nullify, or avoid, the transfer to again render the asset available for redistribution.
- Fraudulent Transfers. If a debtor transferred ownership of property to another with the intent to delay the collection process within two years of filing for bankruptcy, the transfer can be found to be a fraudulent transfer and avoided by the trustee. The two-year time limit may change depending on the state in which the bankruptcy has been filed.
- Bad Faith. If a creditor has been less than straightforward, responsible, and honest in filing their bankruptcy petition, they can be found to have acted in bad faith and the case can be dismissed. Making preferential or fraudulent transfers are both evidence of bad faith, as is trying to make a deal with one creditor in bankruptcy to the detriment of others.
The Creditor’s Place on a Chapter 11 Committee
In Chapter 11 bankruptcy, the bankruptcy trustee must assemble a committee of creditors who try to work with the debtor to make a repayment plan that satisfies all parties. This committee gets to vote on any repayment plan the debtor may submit and can use their influence to overrule it. Furthermore, if the debtor does not submit a repayment plan within 120 days after filing for Chapter 11 bankruptcy, the creditors may submit their own repayment plan.