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In Bankruptcy, Who Gets Paid and When?

As a Creditor, There Are Six (6) Things You Need to do.

As a Creditor, There Are Six (6) Things You Need to do.
©2019, Melissa C. Marsh.
Written: 5/31/2002  
By: Melissa C. Marsh

1. If A Debtor Files For Bankruptcy Cease All Collection Actions Immediately.

Upon being apprised that a bankruptcy has been filed, cease all collection actions, including telephone calls, billing or law suits that might be pending against the debtor. The automatic stay protects the debtor and his property from all forms of collection during the bankruptcy. In Chapter 13, the stay also protects co debtors on consumer debts.

2. File Your Claim with the Court.

The notice of the bankruptcy sent by the court tells the creditor where to file a proof of claim and the deadline for doing so. Act quickly because the deadlines are strictly enforced. Attach a copy of any contracts or judgment concerning your claim, or a summary of the claim, if the supporting documents are voluminous to the proof of claim form. Get the claim form on line if the court did not send one to you.

3. Determine if your Claim has Priority.

Priority refers to the order in which unsecured claims in a bankruptcy case are paid from the money available in the bankruptcy estate. Claims in the higher priority are paid in full before claims in a lower priority receive anything. The order of payment is as follows:

  1. The administrative costs of the bankruptcy are paid first.

  2. In an involuntary bankruptcy, unsecured post petition claims are paid second.

  3. Employee wage claims up to $4300 per claim are paid third.

  4. Contributions to employee benefit plans (up to $4300 per employee) are paid forth.

  5. Farmer and fishermen claims, if any, against debtors operating storage or processing facilities are paid next.

  6. Individual lay-away claims are paid sixth if a deposit was made on an item not yet received.

  7. Court ordered child and spousal support claims are paid seventh.

  8. Finally, recent taxes (income, sales, employment) are paid.

4. Determine if Your Claim is Dischargeable.

Certain claims are non dischargeable in an individual Chapter 7 bankruptcy case. Some nondischargeable claims include: (a) certain debts and obligations arising in divorce, (b) debts incurred by fraud, dishonesty, or willful and malicious “bad” acts by the debtor, and (c) damages arising from drunk driving. Consult a lawyer promptly if your claim arguably falls into one of these categories, because you will have very little time to file an adversary proceeding to preserve your claim.

5. Determine if you have a Secured Claim.

Secured creditors have a lien giving them specific rights to the collateral (property) securing the debt. Most often, secured creditors are in possession of a deed of trust on real property, a security agreement on personal property, or a judgment lien. Secured creditors have the best chance of getting relief from the Automatic Stay to prevent a decline in the equity securing their claim.

6. Provide as much Information as you can to the Trustee.

If you suspect the debtor's financial schedules are concealing assets or reveal that certain assets have been transferred, contact the trustee immediately and provide any documents or facts that might help the trustee recover those monies or property. If that fails, challenge the debtor's right to a discharge either at the first meeting of creditors or by separately scheduled examination under Rule 2004 of the Federal Rules of Bankruptcy Procedure.

7. Continue to Monitor the Progress of the Case.

Finally, continue to monitor the bankruptcy case as it proceeds through the system. Stay informed. Sometimes the court will dismiss a bankruptcy. When that happens, creditors are again free to pursue collection according to state law. In addition, some cases originally classified as "no asset" cases blossom into an asset case from which a dividend may be paid.

© Copyright 1999-2019 Melissa C. Marsh. All Rights Reserved. All Information on this website is subject to a Disclaimer and Use Agreement. This information is provided as general information only and should not be construed as legal advice. We advise you to seek the advice of competent legal counsel to address your own specific questions, facts and circumstances.

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© Copyright 1999-2019 Melissa C. Marsh. All Rights Reserved