What Do You Do When You Receive A Notice That You've Been Named A Creditor In Someone's Bankruptcy?

Posted on: 25 January 2016

What happens if you open your mail to find out that you've been named a creditor in a bankruptcy? The notice could be the result of a loan that you gave your brother to help him through his divorce. It could be related to the non-refundable prepaid money that you put down on the photographer for your daughter's upcoming wedding, now that the photographer is suddenly going out of business. Maybe your ex-spouse is behind on the child support or spousal support payments and listed you as a creditor. In any case, if you want to protect your rights, you can't rely on the court to do it for you. Here's what you should know.

You need to file a response.

Your brother may swear that including your name in the bankruptcy is "just a formality" and that he'll pay you back anyhow, but accepting that as true means giving up your legal rights to press the issue forever. Similarly, you may have known the photographer since you were in high school together, but that doesn't mean that you should trust him to "make it up to you." You may be aware that the court generally doesn't allow support payments to be discharged in bankruptcy, but the court can't just order the back payments to be made without the appropriate paperwork.

If you become a creditor in any bankruptcy proceeding, hire an attorney to file your proof of claim and all necessary supporting documentation. If you have a personal relationship with the debtor, simply explain that it isn't that you don't trust them–that you're just doing what the attorney says you have to do in order to keep everything above-board. That may deflect any hard feelings about the issue.

You need to meet the deadlines.

As a creditor, there are several important deadlines that you need to meet. Generally speaking, sometime within the first 30 days after the bankruptcy is filed, there will be a 341(a) meeting. This is also known as a "meeting of creditors." You, or your attorney, should be present so that you can articulate for the bankruptcy trustee the debt that is owed to you and make sure that the trustee is aware that you would, in fact, being financially harmed by its discharge. 

You'll then have 90 days to get your proof of claim into the trustee. If you're late, absent a very good excuse and the trustee's willingness to accept it, you could lose your opportunity to receive any of money that's distributed to the creditors in the case.

You need to understand the limitations.

Keep in mind that, despite your best efforts, you may end receiving less than the full value or your claim, or nothing at all. If the debtor is filing for a Chapter 13 bankruptcy, the court will make every effort to get creditors repaid, at least partially. In cases where support payments are owed, the court will insist that current payments are made before allowing the bankruptcy to proceed. However, it may take several years before you see what you are owed from the past. 

If the debtor is filing for Chapter 7, there won't be any long-term plan to repay you. Instead, the court will seize the debtor's nonexempt property and sell it. The funds from the sale will then be distributed to creditors. You may or may not ever receive the full amount that you are owed, depending on the amount of non-exempt assets that the debtor has.

If you receive a notice that you've been named a creditor in a bankruptcy case and hope to salvage any part of the debt that's owed to you, talk to a bankruptcy attorney today. To learn more, contact a law firm like Collins Toner & Rusen