Can Creditors Recover Debts from a Debtor Who Files for Bankruptcy?

If you own a business and are owed money from a customer or vendor, you may wonder if you can recover the amounts owed if they file for bankruptcy.

When someone who owes you money files for bankruptcy, their debts do not magically disappear. The type of bankruptcy they file will determine what debts are discharged and what you, as the creditor, can recover. That’s because not all debts are discharged. Creditors can recover certain debts. Here’s what you need to know.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy discharge releases individual debtors from personal liability for most debts. It prevents creditors from taking any collection action against the debtor unless they get approval from the bankruptcy court. Your lawyer can help you understand the scope of the discharge, as there are exceptions in Chapter 7 bankruptcy. In most cases, the bankruptcy court will issue a discharge order relatively early – generally, 60 to 90 days after the date first set for the meeting of creditors. Debtors receive a discharge in more than 99% of Chapter 7 cases.

Chapter 11 Bankruptcy

Creditors can recover debts when a debtor files for Chapter 11 bankruptcy, but the process is structured. Chapter 11 allows the business to reorganize finances while continuing operations. Creditors are categorized (secured, unsecured, priority) and may recover debts through a court-approved repayment plan. The debtor negotiates repayment terms, often reducing or restructuring debts. While some debts may be discharged, creditors typically receive more in Chapter 11 than in Chapter 7 liquidation. However, they may not receive full payment on their debt, or the payments may be stretched out over time.

When a debtor files for Chapter 11, an automatic stay goes into effect, preventing creditors from taking any collection actions against the debtor until the court approves the reorganization plan or unless they get permission from the bankruptcy court. Creditors can vote on the proposed reorganization plan. If the plan is approved, any debts not covered may be discharged, meaning the debtor is no longer legally obligated to pay them.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, the debtor follows a court-approved repayment plan, allowing creditors to recover some or all the debt over time. Certain debts, like taxes and student loans, are generally non-dischargeable.

To receive payment under the plan, creditors must file proof of claim with the bankruptcy court detailing the amount owed. Depending on the debtor’s income and debt amount, creditors may only receive a percentage of their total claim under the repayment plan. If the debtor successfully completes their repayment plan, any remaining dischargeable debt is discharged, meaning the debtor is no longer legally obligated to pay it.

Speak to Our Bankruptcy Attorneys

Bankruptcy can be a complicated process and daunting as a creditor trying to determine whether you can recover the amounts you’re owed.

The Colorado bankruptcy and creditors’ rights attorneys at Brown Dunning Walker Fein Drusch PC have the experience and legal knowledge to assist you with your financial issues. Contact us today to see how we can help. To schedule a consultation today, call (303) 329-3363.