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Protecting Creditors’ Rights In Bankruptcy

Last updated on November 28, 2023

Creditors have options for responding to a bankruptcy, but they often assume that their claim is already lost as soon as a debtor files. A brief investigation of the case at the beginning is essential to see how to preserve a claim or debt.

Many of the common creditors’ methods for responding to consumer bankruptcy also apply to business cases. However, due to the complex nature of a chapter 11 bankruptcy, creditors should seek a personalized consultation with a lawyer to assess their options. The Law Office of Thomas B. Gorrill can work with creditors to preserve their claims in San Diego and other parts of Southern California.

Seek Relief From The Automatic Stay

An automatic stay freezes most legal actions against the debtor. However, if a lawsuit was about to go to trial, or if a foreclosure or eviction was about to occur, a creditor may have grounds to request relief from the automatic stay. This relief can allow creditors to move forward despite the pending bankruptcy case.

Preserving Nondischargeable Debts

In a bankruptcy case, the debtor endeavors to discharge as much debt as possible. To prevent a claim or debt from this discharge, a creditor may file a complaint within 60 days from the first date set for the creditor’s meeting. The complaint may highlight a bad faith issue, such as evidence that the debtor obtained the debt through fraud.

Contesting Discharge In Chapter 7 Cases

Creditors can file a complaint with the bankruptcy court against an individual debtor who seeks Chapter 7 debt relief. If the creditor is successful, the court will deny a discharge of all the applicable debts owed at the time of the bankruptcy petition.

There are several grounds for objecting to a debtor’s discharge, including:

  1. The debtor failed to keep and produce adequate financial records.
  2. The debtor failed to explain satisfactorily a loss of assets.
  3. The debtor made a materially false statement in his bankruptcy papers.
  4. The debtor failed to obey a lawful order of the bankruptcy court.
  5. The debtor fraudulently transferred, concealed or destroyed property of the bankruptcy estate.

Typically, a creditor has less than 90 days after receiving notice of the bankruptcy case to file a complaint. With such a short time period, a creditor must act promptly to learn if grounds exist to object to discharge.

Chapter 13 Plans May Not Be Reasonable

In Chapter 13, debtors submit a plan to repay all or part of their debts. Cases are often dismissed because the debtors fail to comply with the requirements of the case.

For example, a debtor might repeat filing for bankruptcy too many times. Alternatively, the debtor might propose a plan with little to no payment to creditors.

It is important to review the bankruptcy papers at the early stages of the case. A creditor can often get the court to increase the plan dividend or dismiss the case by showing the plan was in bad faith or not feasible.

Assess The Best Path Forward

Creditors have options. The best method depends upon the particular facts of a case. Creditors should seek the advice of experienced counsel. Call 619-237-8889 or email our firm in San Diego for a detailed consultation.