Someone That Owes Me Money For A Personal Loan Just Filed For Bankruptcy. What Happens To My Debt? Will I Be Compensated?
When a Debtor files a bankruptcy case, an order for relief is automatically entered. As the name implies, the order for relief grants the Debtor some strong protections under the bankruptcy code. Regardless of whether the Debtor filed a Chapter 13 or Chapter 7 case, they obtain the full protections of the automatic stay once they’re in bankruptcy. The automatic stay refers to a portion of the bankruptcy code that mandates that all collection efforts must cease once a Debtor files a bankruptcy case. There are some exceptions to the automatic imposition of an automatic stay, such as Debtors who are recent repeat filers, or for certain specifically excluded types of debt, but those are rare and if you believe for some reason that the automatic stay doesn’t apply in your situation, you should contact an attorney to help you. Violations of the automatic stay, even if not intentional, quickly become very costly. It may not seem fair, but if you do not heed the Debtor’s bankruptcy filing and cease all collection, you very likely may end up facing an order for you to pay the Debtor money on top of having your debt wiped out.
So, the first step is cease all collection efforts. This means no calls, no letters, no demands for payment, or any other furtherance of collection. If you have already filed a civil suit against the Debtor, then you are under an obligation to stay and dismiss the pending lawsuit. Any furtherance of a civil suit against a Debtor who has filed bankruptcy is a violation of the automatic stay. There are grounds to seek relief from the automatic stay but they are rare and if you are considering such a request, you should first seek consult with a bankruptcy attorney to determine if you have appropriate grounds to do so.
If the Debtor has filed Chapter 7, your options as an unsecured creditor are limited and in almost all cases you should expect that the debt is not likely to ever be paid. That being said, if someone has filed for bankruptcy there are some things you can do. First, as a creditor you have the right to appear at the 341 meeting and question the Debtor. This right, however, is almost never exercised and is probably not worth your time. The meeting of creditors, despite the name, is usually only a meeting with the Debtor and the bankruptcy Trustee assigned to the case. The Trustee will have reviewed the Debtor’s bankruptcy schedules and will ask questions of the Debtor to verify the accuracy of the information in the Debtor’s bankruptcy paperwork.
Bankruptcy Trustees are very busy and the purpose of the 341 meeting is not to allow creditors to conduct broad discovery. Most bankruptcy Trustees will quickly get frustrated with creditors who appear and ask questions beyond the scope of the meeting, or whose questions really are not appropriate for the 341 setting. Unless you have specific information about assets the Debtor has failed to disclose (i.e., you know they have a house they didn’t list), or you can prove that the Debtor has dramatically falsified their income, it’s probably not going to be worth your time to appear and ask questions at the 341 meeting.
Certain types of debts do survive bankruptcy, but you usually need to prosecute the dischargeability issue in bankruptcy court. 11 U.S.C. §523 lays out specific claims creditors can try to prove to establish that their debt is non-dischargeable in bankruptcy. Specifically, the types of claims held by non-institutional creditors that may be non-dischargeable are those related to fraud, willful and malicious injury, domestic support obligation, or death or personal injury including by negligence if the injury was due to the Debtor being intoxicated from alcohol or drugs. An Adversary Proceeding is a lawsuit in bankruptcy Court held to determine any adversarial issue between parties. Debts from domestic support obligations and debts due to to the Debtor causing injury or death while intoxicated do not require the creditor to file an Adversary Proceeding. Debts based on fraud, or willful and malicious injury require the creditor to timely file an Adversary Proceeding to determine whether the claim meets the requirements for non-dischargeability. Failure to timely file an Adversary Proceeding will result in discharge of the underlying claim.
In a Chapter 13, the main difference from a creditor’s point of view is that all creditors should receive a copy of the Debtor’s Chapter 13 bankruptcy plan. The plan is a complex document that will lay out what amount, if anything, creditors of each class (type of claim) will receive. Often, the plan will pay some fraction of what is owed to unsecured creditors. For example, if a plan proposes to pay 30% of the unsecured claims, then as an unsecured creditor you would receive 30% of the face value of your debt. You will be required to timely file a Proof of Claim form to verify the debt owed to you if you wish to be paid. As a creditor, you also have standing to oppose the Confirmation of the Debtor’s Chapter 13 plan, but non-institutional creditors should be weary about pursuing this unless they have valid grounds to do so. If you plan on opposing the confirmation of a Debtor’s Chapter 13 plan, you should seek out an experienced bankruptcy attorney to represent you, otherwise the most likely outcome is a very uncomfortable hearing with an unhappy bankruptcy Judge. Nobody enjoys unhappy bankruptcy Judges.
This is just an overview and of course, there are plenty of minor exceptions or additions to this general answer, so if you have a claim against a Debtor who filed bankruptcy and you want to know your options, we strongly recommend you seek out a bankruptcy attorney for a consultation. Remember, one misstep with a Debtor who has filed bankruptcy and you could end up paying them.