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If there is one thing collection agencies and trial attorneys fear most about money judgment cases, it is the potential for the judgment debtor to declare bankruptcy. A bankruptcy filing throws a huge wrench into a creditor’s collection efforts. It literally changes everything.
Are you working on a money judgment that appears headed for bankruptcy court? If so, you need to know what bankruptcy could mean to your case. You also need to know what your options are. The remainder of this post is more or less a brief creditor’s guide to get you headed in the right direction. Just be aware of the fact that the debtor’s bankruptcy could eventually mean the end of the line for your collection efforts.
What You Should Know
Knowledge is going to be your best friend if your judgment debtor files for bankruptcy. The more you know about the system, the better prepared you will be regardless of the direction your case takes. There are three key things to know, complements of Salt Lake City-based Judgment Collectors:
1. The Automatic Stay
Bankruptcies in the U.S. are regulated at the federal level. Under the law, a bankruptcy filing automatically triggers an automatic stay. This means that creditors are prohibited from any further collection efforts while the bankruptcy process plays out. Creditors can do nothing until things are resolved legally. As a judgment creditor, you would have to cease all collection efforts.
2. Two Types of Bankruptcies
Federal law defines several types of bankruptcy. Two of them apply to this discussion:
- Chapter 7 – Chapter 7 bankruptcy is an insolvency proceeding. Most unsecured debt, including money judgments, are legally discharged and no longer collectible. Some secured debt might remain intact, allowing a limited number of collection efforts to secure payment.
- Chapter 13 – Chapter 13 bankruptcy is a restructuring proceeding. The debtor is given time and room to restructure finances and come up with a payment plan. Still, some debts might be discharged under Chapter 13.
The type of bankruptcy your debtor files will determine how you proceed. It would be good to have an attorney or collection agency in your corner to help you figure it all out.
3. Judgment Lien Status
In many cases, judgment liens recorded before the bankruptcy filing survive – at least during the initial stages of a bankruptcy proceeding. Such liens will remain intact unless the bankruptcy court finds a legitimate reason to void them.
What You Should Do
Armed with some basic knowledge, the next question is this: what should you do if your debtor files for bankruptcy? First and foremost, stop all collection efforts. Also cease trying to communicate with the debtor. You should then:
- File a proof of claim with the bankruptcy court prior to the court’s deadline.
- If your judgment is secured via liens, file a motion for relief from the automatic stay.
- If your judgment is not secured, you will have to wait for the court to act on your claim.
- Monitor the case as it proceeds through bankruptcy court. You will need to know what’s happening in order to know what to do.
It goes without saying that you should at least consult with an attorney. You might even want to hire an attorney to represent you in any dealings you might have with bankruptcy court.
Bankruptcy law is complex and somewhat convoluted. Having an attorney or a collection agency on your side could represent your best hope of getting something out of the preceding. You could always end up with nothing, so be prepared for that as well.