Bankruptcy Frequently Asked Questions
I. I’ve just received a bankruptcy notice from someone that owes me money. What should I do?
A: Take no further action to collect the debt. Look carefully at the bankruptcy notice itself. See who filed, when, in which bankruptcy court, and under what chapter of the bankruptcy law the person filed. Then see a bankruptcy lawyer for further advice.
II. Does a bankruptcy filing mean I’ll never see my money?
A: Not necessarily. Although most bankruptcies result in no payments to creditors, a well positioned creditor, especially one with collateral, increases the chance that he may receive payment of some or all of his debt.
III. Which types of bankruptcy cases provide for payments to creditors?
A: A Chapter 7 bankruptcy, also known as a “liquidation”, involves the sale of the debtor’s eligible assets to repay debt, but otherwise has no payment plan. A Chapter 7 debtor with no assets eligible for sale, the most common type, and also known as a “No Asset” case, involves no payments to any creditors.
Chapter 11 and 13 bankruptcies require payment plans which must be approved by the bankruptcy judge. Chapter 11 bankruptcies are usually filed by corporations or debtors with very large amounts of debt. Chapter 13 bankruptcies, also known as “wage earner” plans, are filed by individuals who have too many assets, or make too much money, to be eligible for Chapter 7 liquidation.
IV. How do I participate in a payment plan under Chapters 7, 11, or 13?
A: The notice you receive from the bankruptcy court will tell you if there are any assets to be distributed and, if so, the deadline by which you must file your “Proof of Claim.” This is a form which the bankruptcy court requires you to use to register your claim. Generally, you should file a Proof of Claim if there will be a payment plan, even if the debtor listed your claim in his bankruptcy paperwork. Failure to file a Proof of Claim may result in non-payment of your debt under the plan.
V. How much of my debt will be paid in a payment plan?
A: That depends on the plan approved by the bankruptcy judge. While some plans call for 100% payment, most pay substantially below that.
VI. What actions may I take on my own if someone who owes me money files a bankruptcy case?
A: With rare exceptions, you can do nothing. If you attempt to collect a debt from someone who is in bankruptcy, or continue doing so, such as proceeding with an ongoing lawsuit or continuing to garnish his wages, you may be punished by the bankruptcy court and could be forced to pay the bankrupt person’s attorney’s fees as well. Some other actions, such as ongoing wage deductions for child or spousal support, are not affected.
VII. What if more than one person owes me money for a debt but only one of them declares bankruptcy. May I pursue the others?
A: As a general rule, yes. However, if the debt is an obligation owed by both a husband and wife, and the bankruptcy is under Chapter 13, you may not pursue the non-bankrupt spouse without permission of the bankruptcy judge. This “co-debtor stay” was written into the bankruptcy law to improve the chances of the bankrupt person successfully completing his payment plan.
VIII. What happens if my debt is not listed in the bankruptcy case? Does that mean it won’t be eliminated by the bankruptcy?
A: If you know of the bankruptcy case, even if your debt is not listed, your failure to take action to protect your interests will not be excused, and the debt could be discharged and/or you will not participate in any payment plan. You are protected only if you do not know of the bankruptcy and your debt is not listed.
IX. If my debt is secured by collateral, may I simply go and repossess it?
A: No. You may not repossess collateral without the permission of the bankruptcy judge. The debtor is required to advise you and the bankruptcy court what he intends to do about your collateral. If he agrees to return it, obtaining permission is relatively simple. If he refuses, then you will have to have a hearing before the bankruptcy judge.
X. What happens if the collateral is not worth enough to cover the debt?
A: Generally, you only get your collateral back. If the debt is greater than its value, you are treated like the other “unsecured” creditors in the case as to the excess. That means you may get nothing, or only pennies on the dollar.
XI. What do I do if my tenant has declared bankruptcy and is behind on his rent. May I file a state court proceeding to evict him?
A: No, not without permission of the bankruptcy judge. You will need to file a motion with the bankruptcy court asking the judge to “Lift” the “Automatic Stay” imposed when a person files for bankruptcy. If your tenant wants to remain in the property, he’ll have to give you and the bankruptcy judge what is known as “adequate assurance” that he can pay future rent when due. If he cannot, the judge will generally grant your motion and you can then proceed with your eviction proceedings.
XII. My lease with my tenant says that if he declares bankruptcy, that’s a default which will let me end the lease. May I do so?
A: Lease provisions such as this are invalid and may not be enforced in bankruptcy court. If your tenant is otherwise not in default of his lease, you may not terminate his lease simply because he has filed for bankruptcy.
XIII. My tenant is in bankruptcy and wants to end his lease. Does the bankruptcy law allow him to do this?
A: Yes. A tenant may terminate a lease under bankruptcy law. If there is a payment plan in the case, the landlord may file a Proof of Claim for the unpaid past and future rent.
XIV. I heard that some debts are not discharged in bankruptcy. What are they?
A: Not all debts are discharged in bankruptcy. Some, such as for child or spousal support, income taxes, court fines, or student loans, are almost never discharged. No action is required by the creditor to retain those debts. Other debts, such as those which occurred through fraud, theft, intentionally wrongful conduct, drunk driving, or involve obligations arising out of a divorce or property settlement agreement, are not discharged only if the creditor files an Objection to Discharge in the bankruptcy court to keep them from being eliminated.
XV. What do I do if I think I have one of these “non-dischargeable” debts?
A: See a lawyer right away to determine whether the debt is non-dischargeable. If it is, and action is required by you, there is a very limited window of time within which to file your objection to the discharge.
XVI. What is involved in objecting to the discharge of a debt?
A: You must file a Complaint Objecting to Discharge within the required time limits. The complaint is handled as a Federal lawsuit, and is heard at a trial before the bankruptcy judge. This process can be expensive so the debt must be large enough to justify the attorneys fees required to pursue the matter to completion.
XVII. What is the effective date for the discharge of a debt?
A: A debt must have existed on the date of the bankruptcy filing to be eligible for discharge. Debts incurred thereafter are not discharged. If the debtor files his bankruptcy petition on Monday, and borrows money from you on Tuesday, his debt to you will not be discharged by the bankruptcy.
XVIII. What if the debt is for personal injuries in an automobile accident. Can I prevent its discharge by waiting until after the bankruptcy to sue the debtor for my injuries and damages?
A: It won’t help to wait. The debt was incurred on the date of the accident. Even if it has not been resolved by a court judgment, and is what bankruptcy lawyers call an “unliquidated” claim, it arose at the time of the debtor’s negligent or wrongful conduct.
XIX. My employee filed for bankruptcy protection and now I’ve received a “wage order” from the bankruptcy court ordering me to withhold part of his wages and pay them to a bankruptcy trustee. What does this mean?
A: Your employee is probably involved in a Chapter 13 bankruptcy repayment plan. Most bankruptcy trustees and judges, including those in the bankruptcy court in Alexandria, Virginia, require that employers pay over a portion of the employee’s wages to the bankruptcy trustee who pays them to creditors in accordance with a repayment plan. Your failure to obey the Wage Order could result in your punishment by the bankruptcy court, and a requirement that you pay out of your own pocket those wages which you failed to withhold.
XX. That wage order seems like a lot of work. May I simply fire the employee instead?
A: No. Bankruptcy law prohibits this.
XXI. My debtor says he’s going to go into bankruptcy next week, but he wants to pay me part of the debt now. Should I take the money?
A: It’s OK for you to take the money. However, the bankruptcy court can make you pay that money back to the bankruptcy trustee for distribution to all of the creditors if 1) you received it from the debtor within 90 days before he filed for bankruptcy and 2) the amount is more than $600. If your debt qualifies on both counts, then put the money aside until 90 days have passed without a bankruptcy filing or until the trustee tells you what he wants to do about the money.
XXII. Is the debtor allowed to agree to pay my debt after the bankruptcy is over, even if it is discharged?
A: Yes he may. This is known as a reaffirmation of the debt. Reaffirmation agreements are strongly discouraged by bankruptcy lawyers and judges and such an agreement must be approved by the judge. However, there are cases in which such an agreement might be appropriate.
XXIII. I heard that someone who files for bankruptcy cannot get credit for 7 years or more. May I lend him money, if I choose?
A: Certainly. It is not illegal to lend money to someone who has been through a bankruptcy. However, you should carefully consider whether this is a wise business move. If the debtor is in a Chapter 11 or 13 repayment plan, he cannot incur new debt without the permission of the bankruptcy judge. If that’s the case, make certain that the judge has entered an order allowing him to borrow money from you.
