Bankruptcy Laws for Creditors

• A creditor should file a proof of claim.debt defined image by Christopher Walker from Fotolia.com
  
  President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act into law on April 20, 2005. The Act protects creditors who may not be repaid if the bankruptcy court grants debtors discharges of their debts. As a result, fewer debtors can file for Chapter 7 bankruptcy and have their debts discharged in as little as three months. Still many debtors can and do file for bankruptcy, and creditors should be aware of their own rights.
  
  

Automatic Stay

• A debtor files for bankruptcy because he cannot pay his bills when they come due. Filing for bankruptcy gives the debtor breathing room, because once the petition has been filed an automatic stay goes into place. When a creditor receives a notice of bankruptcy, he must stop all collection efforts. The creditor must cease making telephone calls, sending bills or pursuing lawsuits against the debtor. That may not sound like a good deal for the creditor, but it will take the onus for collecting on the debt away from the creditor and place it on an appointed bankruptcy trustee.
  
  

Proof of Claim

• The notice of bankruptcy sent to the creditor will notify the creditor on where to file a proof of claim and the deadline for doing so. On the proof of claim form, the creditor should include information about the court and the case number; information about the creditor; basis for the claim; date debt incurred; court judgments, if any; total amount of the claim at the time the case was filed; type of claim, whether secured, unsecured priority or unsecured nonpriority; and credits. The creditor should attach a copy of any contracts or judgments pertaining to the claim. If these materials are lengthy, the creditor should attach a summary to the proof of claim form.
  
  

Distribution of Payment

• In a Chapter 7 bankruptcy case, the trustee sells the debtor's property in order to repay creditors. After the property has been sold, the trustee will use the proceeds to pay the debtor's creditors. The trustee distributes payment according to the priority of claims. In a Chapter 13 bankruptcy case, the debtor proposes to repay his creditors via a debt repayment plan. The bankruptcy court approves the plan, and the debtor makes monthly plan payments to the trustee. The trustee distributes payment to each of the debtor's creditors each month according to priority. In both chapters of bankruptcy, creditors with nonpriority claims run the risk of not being repaid.