Typically, creditors aren’t happy receiving bankruptcy notices because this almost certainly means they won’t get paid in full. A bankruptcy petition – especially a Chapter 7 one – means that liabilities will only be paid as far as the assets of the debtor can take. Hence, if the debtor’s asset only reaches $10,000 and the debt amounts to $15,000, then the $5,000 difference will be discharged. Note though that there are instances when the creditors themselves initiate bankruptcy proceedings of their client or debtor. This happens when they’re sure that repayment is impossible unless the debtor sells off certain assets under order of the law.
Creditor After Bankruptcy Petition
Upon filing for a bankruptcy – regardless of whether it is approved or not, creditors must abide to the principle of automatic stay. This essentially means that they can no longer call or contact the debtor to push for repayment. The law has already stepped in and while the petition is pending, no action can be made by the creditor against the debtor. This is in order to avoid undue pressure on the debtor even as the law guarantees repayment to the creditor.
Kinds of Creditor
Note that there are different types of creditor, each one afforded with a different treatment when it comes to bankruptcy cases. Here is how this usually goes:
A secured creditor is someone who has a collateral set against the debt. Classic examples of this would be your mortgage or a car loan. Keep in mind that a bankruptcy discharge doesn’t remove the secured creditor’s claim in a property. For example, if you decide to keep your car, you will still have to make regular payments to the creditor. Defaulting on the payment means they can repossess the car. If you choose to surrender the car however, the debt is completely discharged.
The classic example of an unsecured creditor is credit card debt. There’s no collateral attached to the liability and typically, debts of this nature are discharged without question after all assets have been exhausted. Note though that there are exceptions to this case. For example, items purchased after a bankruptcy petition and considered to be luxury goods cannot be discharged in the case.
Priority claims are those that cannot be discharged and often paid first by the trustee. Creditors categorized under this type include tax collections, alimony, child support and even claims for injury.
Meeting of Creditors
A meeting of creditors is often encouraged before bankruptcy petitions are entertained. The meeting covers the financial affairs of the debtor, ensuring whether the discharge is justifiable. More often than not however, creditors do not attend this meeting. Should one appear however, this is the perfect chance for debtors to state their case and convince the debtor of their need for a discharge.
Note that the actions of a creditor may vary depending on the type of Bankruptcy Chapter you file. It’s also possible for creditors to reaffirm a debt which basically means that the debtor recognizes the debt again after discharge. When this happens, the debtor still has to make payments after the bankruptcy petition is approved. This is subject to strict requirements of the law however and seldom happens.