CREDITOR'S RIGHTS IN BANKRUPTCY
Creditors have options for responding to a bankruptcy but they often "throw in the towel" as soon as they discover a bankruptcy was filed. A brief investigation of the case at the beginning is all that is necessary to see what can be done to preserve claim or debt owed by a debtor.
The following are the most common creditor methods for dealing with a consumer bankruptcy. Many of these topics also apply to business cases. However, due to the complex nature of a chapter 11 bankruptcy, those options are not be explored here.
In a bankruptcy case the debtor is trying to discharge as much debt as possible. A creditor may seek a judgment to keep his claim or debt from being discharged. A complaint must be filed with the bankruptcy court within 60 days from the first
date set for the creditor's meeting.
Generally, the claim or debt must fall into one of several categories:
Objection to discharge
- the debt was obtained through fraud on the part of the debtor;
- the debtor embezzled assets or breached his fiduciary duty to the creditor; or
- the debtor is liable for willful and malicious injury to the creditor or his property.
An objection to discharge in a Chapter 7 case begins by filing a complaint in the bankruptcy court against an individual debtor, since only individuals receive a discharge in Chapter 7. If the creditor is successful, the debtor is denied a discharge of all the debts owed at the time of the bankruptcy petition.
There are several grounds for objecting to a debtor's discharge, including:
- the debtor failed to keep and produce adequate financial records;
- the debtor failed to explain satisfactorily a loss of assets;
- the debtor made a materially false statement in his bankruptcy papers;
- the debtor failed to obey a lawful order of the bankruptcy court; or
- the debtor fraudulently transferred, concealed, or destroyed property of the bankruptcy estate.
The complaint must be filed on or before 60 days from the first date set for the creditors meeting. Typically, a creditor has less than 90 days after receiving notice of the bankruptcy case to file a complaint. With such a short time period, a creditor must act promptly to learn if grounds exist to object to discharge.
Relief from the Automatic Stay
Once a bankruptcy petition is filed, an automatic stay goes into effect by law without a court order. Like an injunction, this stay freezes most legal actions against the debtor with certain exceptions. However, if a lawsuit was about to go to trial, or if a foreclosure or eviction was about to occur, a creditor may have grounds to request relief from the automatic stay. They are other occasions when a motion for relief from stay can be filed depending upon the particular facts and circumstances of the case.
Repetitive Chapter 13 Petitions
Chapter 13 is a voluntary proceeding filed by individuals who want to reorganize their finances --- usually to save a home from foreclosure. Debtors submit a plan to repay all of part of their debts. Cases are often dismissed because the debtors fail to comply with the requirements of the case. The 2005 amendments now place severe limits on repeat filings and reduce or eliminate the automatic stay in subsequent cases.
Low Dividend Chapter 13 Plans
Some debtors file a chapter 13 and propose a plan with little or not payment to creditors. By reviewing the bankruptcy papers at the early stages of the case, a creditor can often get the plan dividend increased or get the case dismissed by showing the plan was not feasible or was filed in bad faith.
There are other methods for creditors to respond to a bankruptcy case. The best alternative depends upon the particular facts of a case. Creditors should seek the advice of experienced counsel.