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Fighting For The Bottom Line
Of Businesses Worldwide

Fighting For The Bottom Line
Of Businesses Worldwide

Will you get paid if your debtor declares bankruptcy?

On Behalf of | Apr 28, 2024 | Collections |

It’s frustrating to wait to be paid for products and services provided. You make phone calls, send polite reminders, and eventually end up working with a collection agency in the hopes of receiving the compensation you are owed.

Then you hear the debtor is planning on declaring bankruptcy and become even more frustrated. Will you ever be paid?

Understanding the types of bankruptcy

There are generally two types of bankruptcy. In a Chapter 7 bankruptcy, the debtor’s non-exempt assets (some personal property and possibly, the home) are liquidated to pay off creditors. Secured debts and priority claims are paid before unsecured creditors.

The amount paid, if any, depends on the value of the debtor’s liquidated assets and the total amount owed to all creditors. Many times, unsecured creditors receive little to no payment under Chapter 7 proceedings.

Chapter 13 bankruptcy allows individual debtors to keep their assets and pay creditors over a three to five-year court-approved repayment plan based on their income, expenses, and types of debt. Secured creditors may receive full payment if the property securing the debt is included in the repayment plan. In contrast, unsecured creditors may receive a portion of what’s owed, depending on the debtor’s disposable income and other factors.

Once someone files for bankruptcy, an automatic stay immediately halts most collection efforts against them. Creditors cannot continue lawsuits, wage garnishments or even contact the debtor to demand payment without court permission. 

As a creditor, you have options, including:

  • Filing a proof of claim with the court, which outlines your claim’s amount and basis.
  • Attend a meeting of creditors, allowing you to ask the debtor questions about their financial situation and bankruptcy filing.
  • You can file an objection with the court if you believe your debt falls into a category exempt from discharge.
  • If the debtor filed Chapter 13, you can review the proposed repayment plan to understand how much and when you can expect to be paid.
  • If you have a valid reason, you can petition the court to lift the automatic stay so you can pursue collection efforts.

Anyone filing for bankruptcy has someone working with them to review their options and decide on the best course of action. It would be best if you did the same. Understanding your rights within the bankruptcy process can help maximize your chances of recovering some of the debt owed to you.