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2 ways creditors can respond to a debtor’s bankruptcy

On Behalf of | Jul 17, 2023 | Business Litigation

Most discussions about bankruptcy focus on the rights of the filer. There are many rules that protect people and businesses struggling financially during the bankruptcy process. The courts grant an automatic stay that prevents collection activity and can lead to the dismissal of pending lawsuits. After a review of financial records and meetings organized by the courts, the filer may eventually be able to discharge certain unsecured debts.

Creditors who receive notice that a debtor who owes them money has filed for bankruptcy often jump to the conclusion that they will have to write off that debt. However, creditors do still have legal rights during bankruptcy proceedings. Sometimes, creditors can file their own paperwork with the courts and seek support. These are two of the more common ways that creditors respond in court to a debtor’s bankruptcy filing in the event that they don’t want to write off the debt in question.

Asking to lift the automatic stay

Every creditor and lender will typically need to cease attempting to collect from an individual or business that files for bankruptcy. However, the courts may agree in some scenarios to allow specific creditors to continue certain types of collection activity. For example, creditors might be able to move forward with a lawsuit or with a vehicle repossession, particularly if the party filing owns more than one financed vehicle. The nature of the debt and the intended collection activity, as well as the relationship between the creditor and the borrower will have a major impact on whether the courts are likely to grant a request to continue collection activity.

Asking to be excluded from the discharge

Occasionally, creditors will be able to convince the courts that the debt owed to them is not eligible for a discharge of certain debt. Scenarios that might lead to such outcomes include circumstances where there are signs of fraud, such as spending huge amounts of money in the days leading up to the bankruptcy filing on a line of credit with no true intention to repay those funds.

Creditors who understand their rights can respond more effectively to a bankruptcy filing. Going to court is often necessary for creditors that still want repayments despite a debt’s inclusion in a bankruptcy.