How Does a Creditor Get Reimbursed During Bankruptcy?
- Creditors fall into one of two categories in a bankruptcy: secured claim creditors and unsecured claim creditors.
- A secured claim has collateral attached to it. For instance, a mortgage is secured with the house, while a car note is secured with the car. An unsecured claim does not have collateral. Examples include credit cards, medical bills or legal fees.
- Secured claims take priority over unsecured claims in a bankruptcy. A secured claim creditor can choose to take the collateral in lieu of monetary payment, or can ask to be paid first if all assets are liquidated. Unsecured claim creditors have no collateral to fall back on and will usually receive payment from the remainder of the proceeds after secured claims have been paid. This can amount to only pennies on the dollar, if anything at all.
- If you're a creditor, respond when the court sends the bankruptcy notice with a proof of claim. Do so promptly and before the deadline. Download online the form if the court did not send one. Also, be aware of the type of bankruptcy case that has been filed. This could determine when and how much creditors are paid.
- Once bankruptcy action has started, cease all collection action. Phone calls, legal proceedings, letters or any other form of communication initiated by the creditor is not allowed. Failure to comply can result in the dismissal of a proof of claim.
- Some debts cannot be discharged and will not be covered in a bankruptcy. Examples include debts from divorce obligations or debts incurred in an unlawful, malicious or otherwise illegal manner or action. Creditors in these instances must file an adversary proceeding to ensure that the claim remains active after the bankruptcy.
