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Creditors’ rights in bankruptcy

On Behalf of | Aug 1, 2023 | Business Litigation

Most information out there focuses on the rights of debtors and how they can protect themselves during bankruptcy. However, creditors are the ones who allowed the debtors to borrow money or purchase assets, and they have rights when a debtor declares bankruptcy.


Bankruptcy is the legal process that provides financial relief to individuals and companies by allowing them to either discharge their debt or pay creditors back in a different way than what was originally agreen upon in the lending agreement.

This legal process is usually the last ditch effort on part of the individual or company, when they truly cannot fulfill their financial obligations.

Remember that bankruptcy affects an individual’s credit, which limits the person in what they are able to do in their lives, and it affects a business negatively in that other businesses may not want to work with the individual who managed the company that ended up declaring bankruptcy.

Creditors’ rights

First of all, creditors have a fundamental right to file a claim against a person or business that owes them money. While bankruptcy is designed to help debtors, it also provides important rights and protections for creditors.

Filing a claim against a debtor

When a debtor files for bankruptcy, the court issues an automatic stay that stops all collection efforts. However, creditors have the right to challenge this in court if they can prove that the automatic stay does not serve its intended purpose or is inequitable to the creditor.

Fair and equitable treatment

Creditors have the right to fair and equitable treatment. In other words, creditors with similar claims should be treated similarly. In the case of a Chapter 11 bankruptcy, for example, where the court may allow for a reorganization and repayment, the plan must be fair and equitable when considering the creditors.

Creditors have other rights, too. The law protects them because courts understand the challenges that creditors face when an individual or business files for bankuptcy. It is never an ideal situation.

For these reasons, creditors are treated fairly, able to participate in the legal proceedings, entitled to fair and equitable treatment and other protections under the law.