Bankruptcy can be a lifeline to those individuals trying to get out from under a mountain of debt, but it becomes a point of frustration for the companies forced to move on without collecting the money they were owed.
“When an individual files for personal bankruptcy, the discharge they receive at the end of the process releases them from any personal liability from the specific debts that they have,” says Sara J. Radcliffe, an associate at Kegler, Brown, Hill + Ritter. “A discharge prohibits creditors from ever taking any action against them to collect on those debts.”Bankruptcy protection forbids creditors from initiating any contact with a debtor, even if they have good intentions.
“The creditor would be violating the discharge injunction and they would be subject to sanctions,” Radcliffe says.
The law favors the debtor in most instances, but there are some cases where creditors can recover at least some of the funds they are owed.
Smart Business spoke with Radcliffe about exceptions in the bankruptcy code and how companies can still find ways to collect funds they are owed.
How can a creditor collect on a debt that falls under bankruptcy protection?
If you know the person’s debt is dischargeable because the bankruptcy code has made a ruling that states this is the case, there’s not much you can do. But if the person accrued that debt with some criminal intent or purpose, or is believed to have moved assets around in anticipation of filing for bankruptcy, you as the creditor can file a complaint with the court.
The court can look at the case and either conclude that you deserve to get your debt repaid or find that the debt is dischargeable for a reason.
The first step in seeking to recover this kind of debt is to file a proof of claim with the court saying, ‘We have an interest in this debt and it should not be dischargeable. It should survive the bankruptcy.’ It’s important to know that there is a certain window of time in which you are allowed to file your proof of claim. If you miss that window, the court can rule that it is dischargeable and you lose your chance to recover the funds.
What is another way a creditor can recover debt in a bankruptcy case?
When someone files for bankruptcy, one of the questions that is asked is have you paid any single creditor more than $600 within the past 90 days before you filed for bankruptcy? If the person says yes, the bankruptcy court is allowed to go to that creditor, take that money that was paid and disburse it amongst all of the person’s creditors.
That also applies to family and friends. If they were paid within a certain amount of time of filing, the bankruptcy court can take that money and disburse it among all that person’s creditors.
Debtors also have the option of voluntarily paying back a creditor after the bankruptcy process is over.
In these cases, there is no law against choosing a certain creditor to pay back. But other creditors are still not allowed to follow up and seek their own debt repayment.
How can a creditor get an enforceable obligation to make a debtor repay a debt?
The most common example is with a car loan. At some point before a debtor is granted a discharge, the debtor and a creditor can enter into an agreement which states the debtor is willing to reaffirm that specific debt.
It’s an enforceable obligation that the creditor is allowed to then enforce against that debtor on that loan even when the bankruptcy is over. If the loan can be renegotiated with the lender, it provides an opportunity for the debtor to get a fresh start without having to go out and secure a new car loan so soon after filing for bankruptcy.
In the end, however, the court gets the final say as to whether this is in the debtor’s best interest.
On the creditor side, it’s an option to recover funds that would have otherwise been irretrievable.