Bankruptcy for Creditors, Maine State Bar Association, Lawyer Referral Service

You may eventually be repaid in the bankruptcy case. How much, and when, you are paid will depend upon the kind of bankruptcy filed, and the kind of debt you hold. Some debts, such as child support, student loans, and debt caused by fraud, are unaffected by bankruptcy, and must be paid. If you hold a mortgage on the debtor’s property or other collateral, you may have the right to foreclose, but only after being granted a Motion for Relief from Stay by the court. For debts for which you hold no collateral, and are not the kind that survive bankruptcy, what you will collect will depend upon the facts of the case. In a Ch. 7 “asset” case, you may get a percentage of what you are owed. In a Ch. 7 “no-asset” case, you may get nothing. If the debtor filed a Ch. 13 or Ch. 11 case, you may get a portion of what you are owed, on a schedule approved by the court as part of the debtor’s reorganization plan. With so many variables, it is worth consulting with an attorney to help you maximize your ability to collect.

More Bankruptcy Information

Ch. 7 Bankruptcy - Called “Chapter 7”, or “liquidation,” under this form of bankruptcy, if the debtor has any property that is not protected by law, it is sold to pay creditors. A typical Ch. 7 case takes about 90 days.

Ch. 13 Bankruptcy – Called “Chapter 13,” it involves a 3 to 5 year payment plan. People often use it to prevent foreclosure. A person must have stable income sufficient for living expenses plus any missed mortgage payments and certain other debts and costs. Debts without collateral, such as credit cards, are paid a percentage of what was owed. How much depends on the amount of the debtor’s disposable income. Debts with collateral may be paid depending on the kind of debt and the kind of collateral.

Full Disclosure - Strict laws require full disclosure of all debts and property. If a bankrupt person tries to hide money or property from creditors, the case may be thrown out.

Equal Treatment of Creditors - The law requires equal treatment of creditors. A bankrupt person may not “play favorites” by paying a creditor more than its fair share. This is called a “preference.” That money can be collected and paid out evenly to all creditors.

Non-dischargeable Debts

In Ch. 7 Cases - Some debts cannot be released by bankruptcy. In a Ch. 7 case this includes debts incurred through fraud, debts not listed in the bankruptcy, child support, spousal support, any other divorce-related debt, debts for willful and malicious injury, student loans, debts incurred through drunk driving of any vehicle, some condominium fees and certain others.

In Ch. 13 Cases - In a Ch. 13 more kinds of debts can be discharged. The ones that will survive include long-term secured debts lasting longer than the plan, debts incurred through fraud, debts not listed in the bankruptcy, child support, spousal support, debts for willful and malicious injury that result in personal injury or death, student loans, debts incurred through drunk driving of any vehicle and certain others.

Priority Claims - When there is money to be paid to creditors in a case, some are paid ahead of others. These include child support or spousal support, unpaid wages or commissions up to $10,000 per person, consumer deposits up to $2,225 per person and others.

Secured Claim - If you hold collateral for a debt, you have a secured claim in the bankruptcy. When the secured claim is for the purchase of the collateral, such as a home mortgage, usually you will be paid at least what the collateral is worth or you can take back the collateral. If the security is in the form of a lien you obtained in court, what you get will depend on a number of factors. If the collateral is “exempt”, you could lose your lien.

Unsecured Claim - If you hold no collateral of any kind for a debt, you have an unsecured claim.

Means Test - Persons with mostly consumer debts must meet the “means test” to qualify for Ch. 7 debt relief. Persons who do not meet the test may file a Ch. 13 case instead. Business bankruptcies don’t have to meet the means test.

Trustee - The trustee is a person appointed by the bankruptcy court to supervise the case. Trustees look out for the interests of creditors as a group. Trustees will collect any property of the debtor that is not protected by law, sell it and distribute the money to creditors.

Meeting of Creditors - Also called the 341 meeting. This is an opportunity for you or your attorney to question the debtor under oath. The trustee holds the meeting at the time and place stated in the formal notice of the case mailed to all creditors.

Objections - A creditor may be entitled to object to some aspects of the case. Does the debtor really qualify for Ch. 7? Not everyone does. Did the debtor fail to disclose important property in the case? Is all the debtor’s property really entitled to protection? Is the Ch. 13 plan fair? There are deadlines for filing objections. Consult an attorney.

Collecting from people in bankruptcy may be possible. Consult an attorney who knows the laws and how to manage your claim.

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