The bankruptcy process largely prioritizes the needs of the filer, as the process offers relief from insurmountable debt issues. From the automatic stay that halts collection activity to the discharge of certain eligible debts, the bankruptcy process can help those who have gotten in over their heads financially, but often that financial improvement comes at the expense of creditors.
Businesses anticipating appropriate repayment from a debtor could end up on able to continue collection activity once someone files for bankruptcy. They may no longer be able to take legal action whatsoever if the courts discharge the debt.
Creditors concerned about the impact of bankruptcy proceedings on their finances can take a number of different steps. Asking the courts to exclude an account or debt from the bankruptcy case can be a viable option for some business creditors.
When is a debt eligible for exclusion?
Certain types of debts, including debts owed due to causing financial harm, death or personal injury to others, are typically not eligible for discharge in a bankruptcy filing. If the filer fails to list a debt in their paperwork, it is not eligible for discharge.
Theoretically, almost any unsecured debts are eligible for inclusion in a personal bankruptcy case. Creditors may also be able to take legal action against collateral property if they issued secured loans that the borrower did not reaffirm during the bankruptcy. For creditors with unsecured debts, it is sometimes possible to ask the courts to exclude those debts from the bankruptcy proceedings. There are only a limited number of circumstances in which a debt is not eligible for discharge in bankruptcy proceedings.
One of the most common reasons that creditors ask the courts to exclude a specific debt from a bankruptcy case is an accusation of fraud. The timing of when someone took on the debt compared with when they filed for bankruptcy could indicate that they never intended to repay the debt in full. That situation could justify a request to exclude a debt from the bankruptcy process. Statements someone made during collection efforts could raise questions about fraud when taking on the debt or filing for bankruptcy.
Creditors who learn about their options and have the right advocacy when a debtor files for bankruptcy can avoid potentially significant financial setbacks caused by someone else’s irresponsible conduct. Holding debtors responsible for the amounts that they owe may sometimes require immediate legal action when bankruptcy threatens the rights of a creditor.