The law imposes many limitations on business collection activity. Companies can’t use threats to compel debtors to pay what they owe. They have to call at reasonable times and avoid engaging in harassment.
Thankfully, there are many legal means of collecting on a debt, including litigation. Occasionally, debtors facing increasingly aggressive collection efforts decide to file for bankruptcy. They want to end collection efforts and discharge as much of their debt as possible.
Many businesses simply give up on collecting what they deserve when they learn that a debtor has filed for bankruptcy. However, there are several forms of relief available for creditors when people pursue bankruptcy. How can creditors assert themselves when a debtor initiates bankruptcy proceedings?
1. Asking to lift the automatic stay
Typically, collection activity ends as soon as an individual files for bankruptcy. The courts issue an automatic stay that affects a creditor’s ability to move forward with litigation or continue contacting the debtor.
In some circumstances, individual creditors can initiate adversary proceedings and ask the courts to lift the automatic stay. They may be able to continue their collection efforts despite the debtor seeking bankruptcy relief.
2. Excluding the debt from discharge
Adversary proceedings can also benefit creditors who believe that their debts should not be eligible for discharge. Perhaps an individual engaged in fraudulent activity by continuing to take on debt days before they filed for bankruptcy.
They may have never intended to repay what they borrowed. In such scenarios, the courts may agree that financial misconduct warrants the exclusion of specific financial obligations from the final discharge.
3. Seeking reimbursement during a repayment plan
Depending on the type of bankruptcy that an individual or business files, it may be possible to receive partial payments before the debtor can discharge what remains of their financial obligations. In multiple types of bankruptcy, a structured repayment plan is part of the bankruptcy process.
Creditors can attend a meeting with other creditors, the filing party and the bankruptcy trustee where they negotiate a monthly repayment schedule. The debtor filing for bankruptcy has to commit to a structured plan where the bankruptcy trustee distributes monthly funds to eligible creditors. It may be possible to reduce part of the balance owed by the debtor before they attempt to discharge the debt at the end of their bankruptcy.
Discussing the circumstances surrounding a debt involved in a bankruptcy case can help business creditors explore their options. Bankruptcy is not always the end of a creditor’s financial rights.