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Steps a creditor should take when a borrower files bankruptcy

On Behalf of | Jul 31, 2022 | Creditors’ Rights

Bankruptcy is a legal process available to individuals and corporations looking for debt relief. As a creditor, you must know what to do if someone who owes you money files for bankruptcy.

Creditors must abide by the bankruptcy laws restricting collection against a filer but should also make sure to protect their interests.

Automatic stay

When a debtor files bankruptcy, the Bankruptcy Court imposes an immediate stay against any further collection activity. The debtor’s assets become the property of the bankruptcy estate. Creditors may or may not get paid from the bankruptcy estate, depending on the type of bankruptcy. The payment order also depends on the classification of a creditor’s claim. The automatic stay stops any creditor from satisfying its debt before other creditors in the same class. A secured creditor can request relief from the automatic stay to repossess the property securing the debt.

Proof of claim

You should file a proof of claim that includes all amounts owed by the debtor, including the balance at the time of the bankruptcy and interest that continues to accrue. You will also designate the claim classification as secured or priority if it qualifies for these classes. Creditors must attach detailed statements of amounts owed along with documentation of any liens on the property. You must make sure to file the proof of claim before the deadline set in the filing notification.

Creditors do have rights when a borrower files bankruptcy. You have to work within the confines of the bankruptcy process to enforce those rights.