Is ‘Creditor’s Rights’ an Oxymoron?

As a creditor, you do have rights, beginning with the right to challenge a debtor’s right to discharge your debt. If the debtor is declaring Chapter 11, 12 or 13, you have a right to be heard in court regarding the debtor’s liquidation and restructuring plan. And you may share in the distribution from the bankruptcy estate.

You are no longer allowed to contact a debtor seeking payment once that party has filed bankruptcy. Absent a remedy through direct payment or via a distribution from the bankruptcy estate, here are some other steps a debtor can take:

File a proof of claim. Find out the deadline for filing a claim with the bankruptcy court. Failure to file a claim will eliminate any chance you have of recovering even partial payment.

Attend the 341 creditors meeting. The creditor must meet with a court-appointed trustee. You will learn about the creditor’s repayment plan and object to the plan if you feel you are not being treated fairly.

Monitor court decisions. Public Access Court Electronic Records (PACER) allows online users to obtain any public information on the outcome of a bankruptcy.

Be proactive. Hindsight is 20/20. You may have been burned once by a nonpaying client, but here are some measures you can take to keep it from happening again:

  • Conduct credit checks. Be diligent about background checks. Ask to see cash-flow statements. Draft contracts that specify breach of contract for any account that is over 90 days late with a payment.
  • Get a deposit, collateral or third-party guarantee from clients. When extending credit, negotiate a security agreement. Filing a Uniform Commercial Code 1 form at the very least puts you ahead of many other creditors that are trying to get paid.
  • Get in the habit of getting paid in a timely fashion. Cut off credit to any accounts that are over 90 days late and perhaps even 60.

Enlist legal counsel. Working closely with attorneys who understand the bankruptcy process and who are knowledgeable about enforcement of judgments, pre-judgment attachments and receiverships can make the term “creditors’ rights” actually mean something.

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