When a debtor files for bankruptcy, it is extremely important for creditors to understand their rights and the effect of a bankruptcy filing. If you are a creditor in a current Chapter 7 bankruptcy case, here are a few key tips:
1) Abide by the Automatic Stay. Once a debtor files for Chapter 7 bankruptcy relief, the automatic stay afforded by the bankruptcy filing generally prevents creditors from continuing collection efforts against the debtor or the debtor’s property. If you are looking to foreclose or repossess collateral, you will need to file a motion for stay relief and abandonment. If you knowingly and willingly violate the automatic stay, you may have to pay damages to the debtor.
2) File a Proof of Claim. There are a few reasons that you may want to file a proof of claim in a Chapter 7 case. First, if you are a secured creditor and you want relief from stay to repossess or foreclose on collateral, you will need to demonstrate to the Court and the Chapter 7 Trustee, that you hold a properly perfected security interest. Second, if the debtor’s case has been designated as an asset case, then you will need to file a proof of claim in the case in order to receive a distribution from the bankruptcy estate.
3) Analyze Potential Nondischargeability Claims. If the debtor has committed any fraud in incurring the debt or has submitted a false financial statement to you that you relied on in extending credit to the debtor, then you may have a nondischargeability claim against the debtor. It is important to check old financial statements that the debtor submitted to you against the current bankruptcy petition to check for asset/liability changes that may indicate the debtor has concealed assets or submitted a false financial statement.
4) Obtain Competent Bankruptcy Counsel. In order to file a stay relief motion or thoroughly investigate the basis of a potential nondischargeability action, you will need the aid of competent bankruptcy counsel. Counsel can assist you in understanding the basics of the bankruptcy case and advise you on whether a distribution will be made in the case.