One of the jobs of a bankruptcy trustee in administering a bankruptcy case is to make sure that creditors’ claims are paid back to the extent possible before discharging a debtor’s debts. All creditors have the right to be heard with regard to liquidation of the debtor’s nonexempt assets in Chapter 7 and with regard to the debtor’s repayment plan under Chapter 13. All creditors are also entitled to challenge the debtor’s right to a discharge.
Not all creditors are treated equally in a bankruptcy case. All creditors are entitled to share in payment from the bankruptcy estate, but only according to the priority of their claims. Bankruptcy law favors priority claims like child support, as well as secured claims. Secured claims are those claims in which collateral secures the debt and the creditor can repossess and sell the property if the debtor defaults in payments.
Creditors’ Rights for Secured Claims
Generally, secured creditors have rights based on a deed of trust, a mortgage, a security agreement on personal property like a car, or a judgment lien. Creditors with liens on property are entitled to receive value that is equal to the debt or the collateral—whichever is less. They can also stop a debtor from using cash collateral and collect money from a trustee’s use of secured property that lowers its value, as well as attorneys’ fees and interest that arises.
Secured debts = debts secured by collateral, such as a mortgage or car loan
In some Chapter 7 cases, redemption of a consumer debt secured by tangible collateral is an appropriate solution. With redemption, the debtor redeems the property by buying it back in a lump sum that is the replacement value of the collateral. Often, the replacement value is less than what is owed on the debt. In some cases, if the debtor and the creditor cannot agree on the replacement value of the property, the court can hold a valuation hearing and determine the replacement value. After redemption, the debtor owns the property free and clear.
When a debtor files Chapter 13 bankruptcy, the debtor must either surrender the secured collateral to the creditor, pay off the debt over the course of the reorganization plan in 3-5 years, or pay the debt off outside the reorganization plan, usually within a shorter period of time.
Creditors’ Rights for Unsecured Claims
While a creditor with a lien is entitled to the value of the debt or collateral, whichever is less, an unsecured creditor does not have the same right. In general, unsecured debts, such as medical debt or most credit card debt, are given the lowest priority. As an unsecured creditor, you can file a proof of claim, attend the first meeting of creditors, and file objections to the discharge. You can review the bankruptcy papers that were filed to determine whether there are any inaccuracies. In some cases, you can get the court’s approval to take the debtor’s deposition, if you want to make sure that you are getting paid back the full amount possible, given the debtor’s assets and other debts. However, many unsecured creditors will not be paid in Chapter 7, and they may not be entitled to be paid in Chapter 13, depending on how many priority and secured debts the bankruptcy filer has incurred.
Unsecured debts = debts that are not secured by collateral, such as credit card debt or medical bills
In some cases, the bankruptcy trustee will contact a creditor and ask that the creditor return money the debtor paid before filing bankruptcy. The bankruptcy code prohibits a debtor from preferring one creditor over another. Any payments made on a previous debt in the 90 days preceding a bankruptcy filing may be recovered by the bankruptcy trustee unless you meet requirements for one of the defenses. If you are a relative or friend of the debtor, payments made on a previous debt in the one year preceding the filing date can be similarly recovered.