Understanding Creditors’ Rights in Bankruptcy Cases
Bankruptcy isn’t a get out of jail free card for debtors. Although it stops collections and stays litigation, both secured and unsecured creditors have significant rights during the bankruptcy process.
At Brown Dunning Walker Fein Drusch PC, we’ve been representing the rights of lenders during bankruptcy proceedings since 1987. Our dedicated creditors’ rights attorneys in Colorado will fight to protect your interests and ensure you receive fair consideration when borrowers file for bankruptcy.
Creditors’ Rights in Chapter 7 (Liquidation) Bankruptcy Cases
Traditional bankruptcy proceedings, generally filed under Chapter 7 of the United States Bankruptcy Code, assert that the petitioner is relatively insolvent. The Bankruptcy Code requires debtors filing for Chapter 7 liquidation to qualify for relief, including potential discharge, through a ‘means test.’ During Chapter 7 proceedings, qualifying debtors have their non-exempt assets sold and distributed to eligible creditors in the following order:
- Secured Creditors: Creditors with a lien on specific property, most often a home or vehicle, have first rights to the proceeds of the sale of said property. Any remaining non-exempt balance is then rolled over to cover unsecured claims.
- Priority Unsecured Creditors: By operating under U.S. bankruptcy law, certain unsecured creditors have priority. Priority unsecured creditors typically include government entities seeking to collect child support arrears, alimony, and tax debts. They also include employees who owed certain wages and beneficiaries of personal injury settlements against the debtor.
- Non-Priority Unsecured Creditors: In Chapter 7 cases, it’s often difficult for general unsecured creditors – such as private lenders and credit card companies – to obtain payment. Available funds, if any, are typically distributed to non-priority unsecured creditors in proportion to their claims.
Because most Chapter 7 cases are ‘no-asset’ or insolvency cases, low-priority creditors need to evaluate what rights they may have to receive payment or have their particular debt excluded from discharge. This includes the right to challenge the filing, object to certain distributions, and request the court dismiss the case for non-compliance. Our experienced Chapter 7 creditors’ rights lawyers may also ask the court to conduct a ‘look back’ to determine whether the debtor fraudulently transferred assets to a third party before filing the petition.
Enforcing Creditors’ Rights in Chapter 13 and Chapter 11 Bankruptcy Cases
Unlike Chapter 7 cases, Chapter 13 and Chapter 11 involve debt reorganization rather than liquidation and discharge. Creditors often have more rights in these cases because eligible debtors have a basic income. During reorganization proceedings, the bankruptcy trustee compares the debtor’s expendable income with his outstanding debts. The court then creates a repayment plan of three to five years, after which any remaining eligible debts are discharged.
Most creditors are unaware that Chapter 13 bankruptcy trustees in Colorado are required to hold a creditors’ meeting to discuss the debtor’s finances and any proposed payment plan. Creditors have the right to send legal representation to represent their interests during this meeting, ask questions of the debtor, and gain information that may be used to object to any proposed plan and eventual discharge.
Colorado Creditors’ Rights Lawyers for Bankruptcy
Do not neglect your rights if a debtor files for bankruptcy in Colorado. Creditors have the right to be heard, assert their claims, obtain partial payment, and may even ask the court to dismiss bad-faith bankruptcy cases. Discuss your case with our dedicated lenders’ rights team today by calling (303) 329-3363 or scheduling a consultation online.