Creditors generally need to strategize carefully while simultaneously adhering to the laws that restrict debt collection practices. Some people try to avoid financial responsibility by filing for bankruptcy.
Frequently, creditors who learn about a debtor’s bankruptcy resign themselves to the inevitability of the debtor discharging their debt and avoiding financial responsibility. Contrary to what many business leaders presume, it is actually possible to continue collecting on a debt even after a bankruptcy filing.
What motivated a bankruptcy?
People who owe money typically file for bankruptcy for one of two reasons. The first is to delay litigation, foreclosure or other aggressive collection efforts by securing an automatic stay. All collection efforts typically stop until the resolution of the filing.
The other reason that those in debt file for bankruptcy is to discharge their eligible debts. They can prevent creditors from continuing their collection efforts by reporting the debt, following the bankruptcy process and discharging what they owe. Creditors often despair of recouping their losses after learning that a debtor has filed for bankruptcy.
How can creditors respond?
Bankruptcy laws do take the rights of creditors into consideration. Frequently, frustrated creditors may have the option of initiating an adversary proceeding. An adversary proceeding is a supplementary civil lawsuit filed in relation to an open or pending bankruptcy case.
In some situations, creditors ask the courts to lift the automatic stay. In certain situations, the courts may allow creditors to resume collection activities, including repossession, foreclosure or litigation. An adversary proceeding could also lead to the exclusion of a debt from the bankruptcy case.
A credit card company that can show how a debtor drastically altered their spending habits by increasing their use of credit in the weeks before their bankruptcy filing could allege fraud. They could assert in court that the debtor made those purchases with no intention of repaying the associated debt. The courts may agree to exclude certain debts from the bankruptcy case or to dismiss the bankruptcy due to the conduct of the filer.
Other times, litigation could raise questions about fraudulent transfers intended to hide resources from creditors or the courts. Gifts made to other parties and assets transferred into a trust shortly before a bankruptcy could be indicative of fraud.
Frustrated creditors unsure of how to respond to a bankruptcy filing may be able to initiate civil litigation in response to the bankruptcy case. Reviewing a debt itself, prior collection efforts and the details of a bankruptcy filing with a skilled legal team can help creditors evaluate their options effectively.