Creditors in bankruptcy cases may receive the right to payment despite the problems and issues that arise when a borrower files a bankruptcy case. These rights and remedies must be exercised in a timely fashion. Creditors must remember to take certain action, or perhaps better put, refrain from certain action in the case that any borrower that is an obligee for a debt files a bankruptcy case.
First and foremost, bankruptcy debtors must include each and every creditor on their master mailing list, which is the list of individuals and entities to which the bankruptcy court electronically transmits and mails notices of hearings and the filings of pertinent case documents.
Creditors are normally entitled to a share from the distribution of the bankruptcy estate based on the priority of the claim. Creditors may challenge the dischargeability of a particular debt and, in Chapter 11 and 13 cases, may object to a debtor’s plan of reorganization.
It is imperative to cease any and all collection action which may be pending against the bankruptcy debtor. Creditors must correctly categorize their claim, whether it is rightfully secured or unsecured, and file a proof of claim by the applicable deadline. The classification or categorization of a claim is a significant factor in establishing any priority of payment.
Creditors must understand whether a claim may be discharged in the underlying bankruptcy case. The chapter under which the debtor files is strongly determinative of whether or not many claims are dischargeable. 11 U.S.C. § 523 (Section 523 of the Bankruptcy Code) lists the debts which are not dischargeable in Chapter 7 cases.
In certain situations where a claim may normally be dischargeable, fraud or some other circumstance may negate discharge. Filing an adversary action may, therefore, be necessary to receive any recovery in the related bankruptcy case.
All important documents, especially the debtor’s schedules of assets and liabilities, as well as the statement of financial affairs must be reviewed for accuracy. Certain questions must be raised: Has an asset been concealed or fraudulently transferred? Is the debtor alleging that assets are insufficient to pay any general unsecured creditors?
Carefully and consistently monitoring the progress of the bankruptcy case is crucial if the case is not declared as a “no-asset” case by the bankruptcy trustee and some recovery is possible. Many bankruptcy cases are dismissed, some simply because the debtor failed to comply with some filing requirements or deadline. In this circumstance, creditors may proceed with state collection remedies.
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