Bankruptcy is designed to give individuals and businesses a fresh financial start. However, another purpose of bankruptcy is to ensure that the creditors are treated fairly. Therefore, the Bankruptcy Code gives the creditors a right to participate in the bankruptcy. Most debtors who are represented by a bankruptcy lawyer will never have to personally deal with the creditors. But it is still important to understand what the creditors can do and how they can affect the bankruptcy. The main options available to creditors in bankruptcy are described below.
341 Meeting of Creditors
A meeting of creditors is held in every bankruptcy case. Creditors can attend the meeting of creditors, and ask the debtor questions about his or her finances, debts, and assets. In practice, creditors rarely attend the meeting of creditors, especially in Chapter 7 and Chapter 13 bankruptcies. The Chapter 7 and Chapter 13 trustees usually schedule six meetings of creditors (i.e. meetings for six cases) every half hour, and hold meetings for several hours at a time. It is not uncommon for an entire day of meetings to be held without a single creditor showing up. It is much more likely that a creditor will attend the meeting in a Chapter 11 bankruptcy. Chapter 11 meetings are also longer, normally scheduled for at least half hour each. Generally, credit card companies, major banks, and other national lenders do not show up at these meetings. The types of creditors that do tend to come to meetings of creditors are private lenders and judgment creditors.
Rule 2004 Examination
If a creditor wants to examine a debtor in detail, a creditor can request what is called a Rule 2004 examination. This is a longer examination, similar to a deposition, and allows a creditor to ask more questions than could be asked at a meeting of creditors. Rule 2004 examinations are also very uncommon, especially in Chapter 7 and Chapter 13 bankruptcies. If a creditor requests a Rule 2004 examination, it is usually because there is an active dispute pending, and possibly even a trial or an evidentiary hearing scheduled, or the creditor is exploring the possibility of objecting to the dischargeability of its debt or objecting to the discharge (see below).
Proof of Claim
A proof of claim is the means by which a creditor can get paid from the bankruptcy estate. Most creditors will file a proof of claim when allowed to do so, and this is normal. Proofs of claim are not filed in Chapter 7 cases unless there are assets available for distribution to creditors. In Chapter 13 and Chapter 11 cases, proofs of claim are commonly filed. However, a creditor will not necessarily get paid the amount in its proof of claim. How much a creditor gets paid is determined by the Bankruptcy Code and how much money is available for payment to all creditors.
Request to Lift the Automatic Stay
The filing of a bankruptcy brings into effect the automatic stay, which prevents creditors from taking almost any action against the debtor or the debtor’s property. Sometimes, a creditor may want to proceed with certain actions before the bankruptcy is over. For example, if the debtor is behind on car payments, and does not intend to keep the car, the lender (creditor) may want to repossess the car. To do so, the creditor must request the bankruptcy court to lift the automatic stay. In Chapter 7 bankruptcies, the requests to lift the automatic stay are usually uncontested and have to do with the creditor taking possession of the property that the debtor does not want to keep. In Chapter 13 and Chapter 11 cases, requests to lift the stay are oftentimes contested, and can be used by the creditor to try to gain leverage in negotiations with the debtor.
Objection to Dischargeability of Debt
A creditor can ask the court to except its debt from discharge—this is called objecting to the dischargeability of a debt. In plain English, this means that the creditor wants the debtor to still have to pay the debt after bankruptcy. The grounds on which a creditor can file such a request are limited. The most common grounds for such a request are some kind of fraud, or “willful and malicious injury.” These types of requests are not common. One of the benefits of being represented by an attorney is that, so long as the debtor fully and honestly discloses all relevant information to her lawyer, a competent bankruptcy attorney can advise the debtor in advance if there is a risk of an objection to the dischargeability of a debt being filed.
Objection to Discharge
Another thing a creditor can do is object to the discharge in general. If an objection to discharge is granted, then none of the debt gets eliminated. The grounds for such an objection are also limited, and generally have to do with some kind of fraud. This type of objection is uncommon, but when it does occur, it is often the result of the debtor concealing or not disclosing assets or financial transactions. That is why it is important to fully disclose all relevant financial information in the documents filed with the bankruptcy court.
Get Advice from an Arizona Bankruptcy Attorney
In summary, creditors have a number of ways to participate in a bankruptcy, and can take advantage of any missteps made by the debtor in preparing the bankruptcy or during the bankruptcy process. On the positive side, most debtors will not need to worry about any of these issues. However, the best way to avoid having to deal with creditors and to minimize the chance of creditors affecting the successful completion of the bankruptcy is to have an experienced bankruptcy attorney guiding you through the process and representing your interests. If you are considering filing for bankruptcy in Arizona, and would like to discuss your options, Yusufov Law Firm is here to help. To schedule your free consultation with an Arizona bankruptcy attorney, please call 480-788-0098 in Phoenix/Mesa or 520-745-4429 in the Tucson area.