What are Creditors’ Rights in Bankruptcy?

When filing a bankruptcy under any chapter, all creditors that you owe must be disclosed and notified about your bankruptcy. Once you file for bankruptcy, creditors have a deadline to do certain things in your case. 

First, creditors have the right to appear at your bankruptcy hearing. All bankruptcy debtors must attend a hearing with an assigned bankruptcy trustee. The trustee’s job is to make sure all creditors are treated fairly through the bankruptcy process. The trustee will hold a “Meeting of Creditors” in your case.

Second, creditors have a deadline to file a proof of claim in your case. A proof of claim is a document attesting to the amount of debt the creditor believes you owe. Typically, creditors will list the debt and provide proof or evidence showing that you signed a credit card agreement or other documents showing where you agreed to pay back a loan or credit in the claim. The type of proof of claim creditors file in your case depends on the type of debt owed.

Rights of Creditors in Bankruptcy

Creditors Can Object to Your Discharge

The goal in filing any bankruptcy case is to get a discharge of your debt. A discharge is a court order approving forgiveness of all dischargeable debt. The discharge is entered by the bankruptcy court judge at the end of the case if all requirements have been met by the debtor. However, creditors have the right to examine your bankruptcy documents and the history of your relationship with the creditor. 

For example, credit card lenders can object to your discharge if you have used the credit card within 90 days of filing your case. Typically, discharge objections are filed when the debtor uses the credit card for luxury or egregious spending right before filing the bankruptcy case. Creditors will also object to your discharge for taking a cash advance or a balance transfer within the 90-day period before filing a bankruptcy case. 

Further, creditors can object to your discharge for fraud or dishonesty. If you provide a credit lender with false or misleading information about your financial situation when you obtained the credit account, the credit lender can object to your discharge. 

Additionally, if the lender can prove that you obtained credit with no intention of ever repaying the debt, the lender can object to your discharge. These objections require proof from the lender of wrongdoing by a bankruptcy debtor. In many cases, these objections can result in a trial or evidentiary hearing in front of the bankruptcy court and the judge will decide whether the debtor has violated their credit agreement with the lender and should have their discharge revoked as to that creditor.

Creditors Can Request the Court to Remove Your Bankruptcy Protections

When you file for bankruptcy, you are automatically given certain bankruptcy protections that prevent creditors from repossessing or foreclosing on your assets such as your home or car. 

If you file for Chapter 7 or Chapter 13 bankruptcy and you are behind on the payments for secured assets, the creditor can make a request to the court that removes your bankruptcy protections. Once removed, the creditor can then move forward with repossessing or foreclosure on any asset that you may be behind on the payments. 

Typically, in Chapter 13 cases, arrears owed on a home or car will be paid through the Chapter 13 plan, which satisfies the creditor’s need to be paid what was owed. However, in Chapter 7 cases, if you are not current with your home or car loan or able to become current by the time your case is filed, creditors might determine you as a higher risk for repayment. This might encourage the creditor to want their asset back versus hoping you will make the payments or catch up on the debt.

Creditors Can Object to Your Chapter 13 Plan of Reorganization

If you filed a Chapter 13 bankruptcy, you are required to list priority and secured creditors in your plan of reorganization and explain how you will repay these debts over the life of the plan. Creditors have the right to review the plan and determine if you have met their requirements for repayment. 

If you have proposed a plan that does not meet the creditor’s requirements such as proposing a lower interest rate or a reduction in principal balance, the creditor might object to your plan. The proposed plan filed at the beginning of your Chapter 13 case typically discloses the debt after running a credit report, however, credit reports are not always accurate with what the credit lender shows on their records. If a creditor objects to your Chapter 13 plan, those objections must be resolved before the court will approve your plan and allow your case to move forward. 

While creditors’ rights are limited under the law for bankruptcy filers, they do have options when bankruptcy debtors are in violation. There may be other circumstances where creditors have the ability to challenge your bankruptcy depending on the specific facts of your case. You should always contact a bankruptcy lawyer before filing any chapter of bankruptcy. Bankruptcy law is complex and requires a certain amount of knowledge of the bankruptcy code to handle creditor situations. 

It is better to be protected under the bankruptcy rules and avoid creditor situations by hiring a bankruptcy lawyer to help with your case.

How Does Bankruptcy Affect Creditors?

Bankruptcy can have significant effects on creditors, who are individuals or entities to whom a debtor owes money. The impact of bankruptcy on creditors depends on the type of bankruptcy filed, the debtor’s financial situation, and the specific circumstances of the case. Here are some of the key ways in which bankruptcy affects creditors:

Delayed or Reduced Repayment

In a bankruptcy proceeding, creditors may not receive the full amount they are owed, and they may experience delays in repayment. In Chapter 7 bankruptcy, unsecured creditors often receive only a portion of their outstanding debts, if anything at all, as the debtor’s non-exempt assets are liquidated to pay off debts. In Chapter 13 bankruptcy, creditors may receive partial repayment for three to five years.

Automatic Stay

When a debtor files for bankruptcy, an automatic stay goes into effect, which halts all collection efforts by creditors. This means that creditors cannot continue with lawsuits, garnishments, foreclosures, or other collection activities while the bankruptcy case is pending.

Priority of Claims

In bankruptcy, creditors are categorized into different classes, and the order in which they are paid depends on their priority. Secured creditors, such as mortgage lenders, usually have a higher priority and are more likely to be paid in full. Unsecured creditors, like credit card companies, are often lower in priority and may receive only a fraction of what they are owed.

Discharge of Debts

In Chapter 7 bankruptcy, many unsecured debts can be discharged, meaning they are wiped out, and the debtor is no longer legally obligated to repay them. This can be detrimental to unsecured creditors because they may not recover anything from the debtor.

Repayment Plans

In Chapter 13 bankruptcy, creditors may be subject to a court-approved repayment plan, which can involve partial repayment over several years. Creditors must comply with the terms of the plan, and the amount they receive depends on the debtor’s disposable income and the specific terms of the plan.

Cramdowns

In some cases, Chapter 13 bankruptcy allows for “cramdowns” where the debtor may reduce the principal balance of secured debts, such as auto loans or mortgages, to the fair market value of the collateral. This can result in the creditor receiving less than the full amount they are owed.

What Happens at the Meeting of Creditors for Chapter 7

During this hearing, the bankruptcy trustee will ask whether any creditors are appearing to ask questions of the debtor. Creditors may appear, but in most cases, they do not. Creditors are not penalized for failing to appear and the creditors’ rights in your case are not hindered if they do not appear. 

If you are considering filing for bankruptcy, call us today at 623-777-4760. 

We have offices in Phoenix, Arizona, and Glendale, Arizona.

Creditors Rights Attorney

A creditor’s attorney or creditors’ rights lawyer is a legal professional who specializes in representing the interests of creditors in various financial matters, including debt collection, bankruptcy proceedings, and other aspects of credit and lending. 

These attorneys typically work on behalf of individuals, businesses, banks, financial institutions, and other entities that are owed money by debtors.

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