Understanding the rights of creditors in bankruptcy cases
Calvin Craig • September 30, 2022
Understanding the rights of creditors in bankruptcy cases
Bankruptcy is a legal process that offers relief to people who cannot pay off their debts. Once a person or business files for bankruptcy, their creditors must stop trying to collect debts.
Bankruptcy benefits debtors because it allows them to discharge their debts. Although the filing will be on their credit report for up to 10 years, people in debt can get a fresh financial start and avoid the stressful collections process.
What if you are a lender and someone who owes you money files for bankruptcy? Though you may think that bankruptcy means you will never be repaid, it's possible you will see some or all of your money returned by the end of the process.
Creditors must take specific steps when notified of a bankruptcy filing involving their debtor. As a lender, you have privileges in bankruptcy cases, including the right to make your case for complete repayment. However, your rights can vary depending on the details of your loan and the debtor's overall financial situation.
Types of bankruptcy
When a person files for bankruptcy, the court puts their debts on hold. However, they still have to pay as much as possible of the total amount owed.
Chapter 7 bankruptcy is the most common form of insolvency, while you may also encounter debtors who file for Chapter 13 bankruptcy.
Here is a look at what you can expect as a lender if you get bankruptcy notice involving one of your debtors.
- Chapter 7 bankruptcy is also called liquidation bankruptcy. This process allows debtors to start afresh by discharging all of their debt. A bankruptcy court pays off as much of the debt as possible by liquidating the bankrupt person's assets and giving the proceeds to lenders. A trustee handles the sale of assets and the distribution of the profits. This court-appointed representative pays lenders based on priority. For example, secured loans get paid first, followed by unsecured debt. In many instances, a debtor can keep necessities, such as their residential home, work equipment, and vehicle needed for transport, during the liquidation process.
- Chapter 13 bankruptcy is also known as reorganization bankruptcy. This process is different because there is no liquidation of assets. The debtor starts the process by going to credit counseling and making a plan to repay existing debt. However, instead of paying lenders directly, the debtor deposits money into an account managed by a trustee. The process can take three to five years, with the trustee paying off debts in order of priority.
Chapter 11 is the other well-known type of bankruptcy, but it is only available to corporations, who can use the process to restructure and repay existing debts without having to stop operations. Unless you are a large shareholder or institutional lender, you will likely not be confronted with a Chapter 11 bankruptcy.
The importance of priority for creditors during a bankruptcy case
A lender's hopes of repayment after a bankruptcy filing depend on the loan agreement and terms.
A bankruptcy court treats creditors differently depending on the priority of debt and the type of debt security or collateral. If the debt was unsecured, such as a medical or credit card bill, you will typically have a lower priority for repayment.
Creditors who have secured loans, such as mortgages or vehicle loans, typically have a higher priority. The trustee will attempt to give them the value of the security assets from the liquidation proceeds.
Depending on the assets and financial situation of the debtor, a lender waiting for compensation for an unsecured loan may only receive partial repayment or no reimbursement.
Can creditors reject a bankruptcy discharge plan?
As a creditor, you have the right to reject part of the bankruptcy discharge. You can do so by filing an adversary proceeding. This case will require a lawyer because you need to prove that the debtor purposely misled the trustee and court to avoid repayment or engaged in another fraudulent activity to hide assets or avoid repayment. The alleged fraud could be in the bankruptcy filing itself or in any activities related to the debt before the bankruptcy filing.
Many of these cases involve people intentionally running up credit card debt or taking out loans in the months before declaring bankruptcy or signing property over to relatives to avoid liquidation.
What should a creditor do after they receive a bankruptcy notice?
If you receive a bankruptcy notice involving one of your debtors, there are specific steps you need to take to abide by the law and give yourself the best possible chance of getting a partial or full repayment.
- Stop any collection efforts or follow-ups about the debt. Once the debtor files for bankruptcy, they are protected from additional collection efforts. It is against the law to contact the borrower after you receive a bankruptcy notice.
- File your proof of claim with the court before the deadline. In most cases, you can submit your documents up to 70 days after the bankruptcy filing.
- Make sure to identify assets associated with secured debts. This is an important step because, in most cases, debts secured by property move to the front of the line for repayment.
- Accept or reject the debtor's discharge plans. The trustee will hold a "meeting of creditors," during which you can assess the bankruptcy discharge plan. In most instances, the trustee collects and verifies all supporting documentation beforehand. Except in some special cases, creditors or their legal representatives do not attend the actual meeting of creditors. You have 60 days from the meeting to reject the discharge plan.
When a debtor files for bankruptcy, the court tries to ensure they pay as many debts as possible through liquidation or a long-term repayment plan. However, you may want to hire a bankruptcy lawyer to represent your interests during the process. In addition to advising you about timeframes and proof of claim, they can review documents and supporting evidence to ensure the debtor is accurately representing their total wealth and not purposely hiding property or misrepresenting its necessity.
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How Do I Know If I Should File for Chapter 7 or Chapter 13 Bankruptcy in North Carolina?
Filing for bankruptcy can be a difficult decision, but for many individuals and families in financial distress, it can offer a fresh start. Chapter 13 bankruptcy, also known as a “wage earner’s plan,” allows debtors to create a plan to repay all or part of their debts over time. At the Law Office of Calvin Craig in North Carolina, we help clients navigate the Chapter 13 bankruptcy process and regain control of their financial future.  What Is Chapter 13 Bankruptcy? Chapter 13 bankruptcy is designed for individuals who have a steady income but are struggling to keep up with their debts. Unlike Chapter 7, which involves liquidating assets to pay off debts, Chapter 13 allows you to restructure your debts into a manageable payment plan that lasts three to five years. During this period, you make regular payments to a bankruptcy trustee, who then distributes the funds to your creditors. Key Benefits of Chapter 13 Bankruptcy Avoid Foreclosure: One of the biggest advantages of Chapter 13 is its ability to stop foreclosure proceedings. If you’ve fallen behind on mortgage payments, Chapter 13 gives you the opportunity to catch up on those payments over time while protecting your home from foreclosure. Consolidated Payments: Chapter 13 allows you to combine your debts into one manageable monthly payment. This can simplify your financial situation and reduce the stress of dealing with multiple creditors. Protection of Assets: Unlike Chapter 7, which may require you to sell certain assets to pay creditors, Chapter 13 allows you to keep your property while making payments on your debts. Debt Discharge: At the end of the repayment period, any remaining unsecured debts (such as credit card debt or medical bills) may be discharged, meaning you will no longer be required to pay them. Stop Collection Efforts: Once you file for Chapter 13, an automatic stay goes into effect, which halts wage garnishments, lawsuits, and collection calls from creditors. Eligibility for Chapter 13 Bankruptcy To qualify for Chapter 13 bankruptcy, you must meet certain criteria: Regular Income: Chapter 13 requires you to have a steady income that allows you to make regular payments under a repayment plan. Debt Limits: As of 2023, unsecured debts (such as credit cards and medical bills) must be below $465,275, and secured debts (such as mortgages and car loans) must be below $1,395,875 to qualify for Chapter 13. Tax Filings: You must be up to date with your tax filings to be eligible for Chapter 13 bankruptcy. The Chapter 13 Bankruptcy Process Filing the Petition: The process begins when you file a bankruptcy petition with the court. This includes providing detailed information about your assets, debts, income, and expenses. Creating a Repayment Plan: You will work with your attorney to create a repayment plan that outlines how you will repay your debts over the next three to five years. The plan must be approved by the bankruptcy court. Automatic Stay: Once the petition is filed, an automatic stay goes into effect. This prevents creditors from taking any collection actions, including foreclosure, repossession, or wage garnishment. Making Payments: You will begin making monthly payments to a bankruptcy trustee, who will distribute the funds to your creditors according to the approved repayment plan. Completion of the Plan: If you successfully complete the repayment plan, any remaining eligible unsecured debts may be discharged, giving you a fresh financial start. How Chapter 13 Differs from Chapter 7 While both Chapter 13 and Chapter 7 bankruptcy offer relief from overwhelming debt, they are fundamentally different. Chapter 7 is typically faster, allowing for the liquidation of non-exempt assets to pay off debts within a few months. However, it may require the sale of valuable assets and is only available to individuals who pass the means test, which measures your ability to repay debts based on your income. Chapter 13, on the other hand, is a reorganization of your debts that allows you to keep your property and repay what you owe over time. It is an ideal option for individuals who are behind on mortgage or car payments and want to avoid losing their home or vehicle. Why You Need an Experienced Bankruptcy Attorney Filing for Chapter 13 bankruptcy is a complex process that requires a deep understanding of bankruptcy law and financial planning. Having an experienced bankruptcy attorney by your side can make a significant difference in the outcome of your case. At the Law Office of Calvin Craig, we guide clients through each step of the process, ensuring that they meet all the necessary requirements and create a repayment plan that works for their unique financial situation. Our services include: Personalized Legal Advice: We help you understand your options and determine whether Chapter 13 bankruptcy is the best solution for your financial challenges. Filing Your Petition: We assist with filing all the necessary paperwork and ensuring that your petition is complete and accurate. Creating a Repayment Plan: We work with you to create a feasible repayment plan that fits your budget and meets the court’s requirements. Representation in Court: We represent you in court and at any hearings, advocating on your behalf to protect your rights and interests. Chapter 13 bankruptcy can be a powerful tool for individuals in North Carolina who are struggling with debt but want to keep their property and regain financial stability. By working with an experienced bankruptcy attorney at the Law Office of Calvin Craig, you can navigate the complexities of Chapter 13 and start building a brighter financial future. If you’re considering filing for Chapter 13 bankruptcy or need advice on managing your debt, contact the Law Office of Calvin Craig today for a consultation. We’re here to help you every step of the way.
Chapter 7 bankruptcy is a legal process that provides individuals with a fresh financial start by discharging most of their unsecured debts. If you are overwhelmed by credit card debt, medical bills, or other financial obligations, Chapter 7 may offer the relief you need. However, it’s not a decision to take lightly, as the process can have a lasting impact on your credit and finances. In this post, we’ll explore the ins and outs of filing for Chapter 7 bankruptcy in North Carolina, including eligibility requirements, the process, and what to expect. What is Chapter 7 Bankruptcy? Chapter 7 bankruptcy, also known as “liquidation bankruptcy”, involves the sale of certain non-exempt assets to pay off creditors. In exchange, most of your unsecured debts—such as credit card debt, medical bills, and personal loans—are eliminated, giving you a chance to rebuild your financial life. The process is typically completed within three to six months, making it a relatively quick way to achieve debt relief. Who is Eligible for Chapter 7 Bankruptcy in North Carolina? Not everyone qualifies for Chapter 7 bankruptcy. To determine eligibility, you must pass the Chapter 7 Means Test, a formula that evaluates your income, expenses, and family size to determine whether you have enough disposable income to repay your debts. Means Test: The means test compares your average monthly income over the past six months to the median income for a household of your size in North Carolina. If your income is below the state median, you automatically qualify. If your income is above the median, you must complete a more detailed means test to assess your disposable income. The purpose of this test is to prevent individuals who can afford to repay their debts from abusing the bankruptcy system. Prior Bankruptcy Discharges: If you have previously filed for Chapter 7 bankruptcy within the last eight years, you are not eligible to file again until the time limit has passed. Credit Counseling Requirement: Before filing, you must complete an approved credit counseling course within 180 days of your bankruptcy filing. This course is designed to help you understand your options and determine whether bankruptcy is the best solution for your financial situation. The Chapter 7 Bankruptcy Process in North Carolina Filing for Chapter 7 bankruptcy involves several steps. Here’s an overview of what to expect: Filing the Petition The process begins with filing a bankruptcy petition and accompanying schedules with the U.S. Bankruptcy Court for the district where you live. In North Carolina, there are three federal bankruptcy districts: the Eastern, Middle, and Western Districts. The filing includes detailed information about your assets, liabilities, income, and expenses. Automatic Stay Once you file, an automatic stay goes into effect immediately. This court order halts most collection actions, including wage garnishments, lawsuits, and creditor harassment, providing you with temporary relief while your case is pending. Appointment of a Bankruptcy Trustee The court appoints a bankruptcy trustee to oversee your case. The trustee’s role is to review your petition, identify non-exempt assets that can be sold, and ensure that the bankruptcy process is conducted fairly. Meeting of Creditors (341 Meeting) About 20 to 40 days after filing, you will attend a 341 Meeting of Creditors, where the trustee and any creditors who wish to attend will ask questions about your financial situation and the information provided in your bankruptcy petition. In most cases, creditors do not attend, and the meeting is relatively straightforward. Exemption of Assets North Carolina has its own set of exemption laws that dictate which assets you can keep. Common exemptions include equity in your home (up to a certain amount), retirement accounts, personal property, and certain household goods. If your assets exceed these exemptions, the trustee may sell the non-exempt property to pay creditors. Discharge of Debts If everything is in order and no objections are raised, the court will issue a discharge order, eliminating most of your unsecured debts. Certain debts, such as student loans, child support, and recent tax obligations, are not dischargeable. What Debts Are Discharged in Chapter 7 Bankruptcy? One of the main benefits of Chapter 7 bankruptcy is the discharge of unsecured debts, which means you are no longer legally required to repay them. Some of the most common debts that can be discharged include: Credit card debt Medical bills Personal loans Utility bills Certain older tax debts Payday loans What Debts Cannot Be Discharged? While Chapter 7 can wipe out many types of debt, some obligations remain. Debts that cannot be discharged include: Child support and alimony Student loans (except in rare cases of undue hardship) Recent tax debts Debts incurred through fraud or willful misconduct Court-ordered fines and penalties Pros and Cons of Chapter 7 Bankruptcy Before deciding to file for Chapter 7 bankruptcy, it’s important to weigh the pros and cons. Pros: Quick Debt Relief: Most Chapter 7 cases are completed in a few months. Automatic Stay: Immediately stops collection actions, giving you breathing room. Debt Discharge: Eliminates most unsecured debts, allowing you to start over financially. Cons: Impact on Credit: Chapter 7 remains on your credit report for 10 years, which can make it difficult to obtain new credit. Loss of Non-Exempt Assets: You may have to surrender certain assets to the bankruptcy trustee. Not All Debts Are Dischargeable: Some debts, like student loans and child support, will still need to be paid. Life After Chapter 7: Rebuilding Your Financial Future Filing for Chapter 7 bankruptcy can feel overwhelming, but it’s also an opportunity for a fresh start. After your debts are discharged, you can begin rebuilding your financial life. Consider the following steps: Create a Budget: Develop a budget that allows you to manage your finances responsibly. Build an Emergency Fund: Start setting aside money for emergencies to avoid future debt. Rebuild Your Credit: Consider using a secured credit card or becoming an authorized user on someone else’s account to rebuild your credit. How The Law Office of Calvin Craig Can Help Deciding whether to file for Chapter 7 bankruptcy is a difficult decision that requires a thorough understanding of your financial situation and the potential consequences. At the Law Office of Calvin Craig, we have extensive experience guiding clients through the bankruptcy process in North Carolina. We can evaluate your situation, help you understand your options, and provide the support you need to make informed decisions. If you’re considering Chapter 7 bankruptcy or have questions about your eligibility, contact us today to schedule a consultation. Our team is here to help you achieve a fresh financial start!