U.S. bankruptcies are on the rise nationwide. In fact, U.S. consumer bankruptcies could top 1.6 million this year. The most common reasons for filing personal bankruptcy are bad mortgage debt, credit card debt, medical bills and divorce.
All these bankruptcy filings are affecting not just the people filing bankruptcy, but also their creditors.
While most people who declare bankruptcy do so as an absolute last resort, sometimes the debtor has regular income or valuable assets that could be used to pay off a portion of the debts.
If you are owed money by someone who declared bankruptcy recently, it does not mean you have no chance of recovering on the debt. You still have options for pursuing money owed to you.
Here are the steps you should follow if you are a creditor and someone who owes you money has declared bankruptcy.
Automatic Stay Stops All Collection Activities
The first important lesson is that when a debtor files for bankruptcy protection, all collection activities must stop. That means even if you were trying to collect on a $10,000 personal loan, you must stop all phone calls, emails or direct contact to pursue the debt. However, that does not mean you cannot continue to try to get your money back through the courts. In a sense, the fight simply shifts from the streets to the courthouse.
Determine if Your Debt is Secured or Unsecured
Debt can be secured by property or unsecured, and it is treated differently in bankruptcy court if it is secured or unsecured. Chances are you already know whether your debt is secured or unsecured so I won’t dwell on this, but it’s worth asking yourself first if your debt is secured. Real estate loans and commercial equipment loans are generally secured, while credit cards or personal loans tend to be unsecured.
Is the Debtor filing Chapter 7 or Chapter 13?
There are two main kinds of bankruptcy filings which entail the majority of individual bankruptcy filings: Chapter 7 and Chapter 13. A Chapter 7 filing is a total liquidation where most of the debtor’s personal assets are sold off to pay the creditors. In order to qualify for a Chapter 7, a debtor must make very little to no income.
Chapter 13: Repayment Over Time
If the debtor earns too much money to qualify for a Chapter 7, then they generally file for a Chapter 13. A Chapter 13 filing allows an individual with substantial debts, but regular income, to file for bankruptcy protection and doesn’t automatically eliminate the debtor from eligibility. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
File A Proof of Claim
In order to protect your claim, you need to file a “Proof of Claim.” The deadline for filing a proof of claim varies so you want to be sure to file the Proof early to ensure you do not waive your right to your property. Creditors in Chapter 7 and 13 cases generally must file their Proof of Claim 90 days from the date first set for the meeting of creditors.