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Creditor Rights

A creditor has the basic right to receive a fair share of a debtor’s non-exempt assets in a Chapter 7 case and to be treated fairly in a Chapter 11, 12, or 13 case. A secured creditor (i.e., one who has a lien on property to secure the debt a debtor owes) has a right to “adequate assurance” that the debtor will pay the debt, including any past-due arrearages.

In a “no-asset” Chapter 7 case, there are no assets that the court appointed trustee can sell. Most unsecured debts will be discharged. Therefore, the only creditors who will actually participate in the case are the ones who hold security. They may file motions for relief from the automatic stay in order to foreclose on their loan or repossess the property securing the loan. The court generally holds a hearing on such a motion at which time a debtor can contest the proposed action.

In an “asset” Chapter 7 case, there are assets that the trustee will sell. The trustee will deduct a fee for his/her services and distribute the remainder among unsecured creditors based on a priority scheme contained in the Bankruptcy Code. Creditors will be told to file proofs of claim with the court in order to participate in this eventual distribution. Properly filed claims are presumed to be accurate, which means that the creditor need not actually prove a debt unless someone objects.

As a creditor, you may believe that you have grounds for your debt to survive the bankruptcy. A creditor holding such a debt may (and sometimes must) commence an “adversary proceeding” before a court-established deadline to obtain a ruling that your particular debt will not be discharged (Complaint to Determine Non-Dischargeability) or that the debtor’s entire discharge should be denied (Complaint Objecting to Discharge).

There are several grounds for claiming that your particular debt should not be discharged (Complaint to Determine Non-Dischargeability), including:

  • The debt was obtained through fraud on the part of the debtor.
  • The debtor embezzled assets or breached his fiduciary duty to the creditor.
  • The debtor is liable for willful and malicious injury to the creditor or the creditor’s property.

If you obtain a judgment against the debtor that your debt is non-dischargeable, only your particular debt will survive the bankruptcy and you are free to collect on your obligation.

The grounds to object to the debtor’s entire discharge (Complaint Objecting to Discharge) include:

  • The debtor failed to keep and produce adequate financial records.
  • The debtor failed to explain satisfactorily a loss of assets.
  • The debtor made a materially false statement in his bankruptcy papers.
  • The debtor fraudulently transferred, concealed, or destroyed property of the bankruptcy estate.

If you obtain a judgment denying the discharge of the debtor, the debts of all creditors listed in the bankruptcy survive and everyone can collect against the debtor.