When someone owes your company money, you expect them to make good on their obligation. The vast majority of individuals and businesses will make sure to pay what they owe others. Unfortunately, there are a handful of companies and individuals who either through misfortune, financial mismanagement or willful misconduct do not meet their obligations to others.
When a borrower or debtor defaults on the amount they owe you, your company may have to begin collection efforts, ranging from calling them up to possibly filing a civil lawsuit. Putting pressure on them may be the only way to convince them to repay you as they should.
If that individual or business that owes you money files for bankruptcy, your collection activity has to temporarily halt. There is an automatic stay that affects your rights as a creditor until the bankruptcy moves forward. Thankfully, if you believe that the debt should not be part of the bankruptcy or the individual intends to abuse bankruptcy proceedings, you have the right to fight back.
Adversary proceedings can protect you as a creditor
Under federal bankruptcy statutes, both the individual filing for bankruptcy and the creditors possibly affected by a bankruptcy filing have the right to request an adversary proceeding. An adversary proceeding could challenge the validity of a debt or establish that it does not qualify for inclusion in the bankruptcy. It can also call attention to fraudulent or preferential transfers.
If your company can successfully argue your case in an adversary proceeding, the judge can potentially omit your debt from the filers discharge or even lift the automatic stay and allow you to proceed with collection efforts even as the bankruptcy moves forward. A timely filing could save your company from a massive financial loss, especially if you think you have a chance of excluding your debt from someone’s discharge.
Creditors’ rights often aren’t the focus in bankruptcy
As someone owed money by another person or business, you have rights, including the right to pursue collection activity and to demand repayment, possibly through liens or wage garnishments.
Unfortunately, your needs likely won’t be the focus of discussions during standard bankruptcy proceedings. The courts typically focus more on the individual filing for financial relief than those potentially affected by their filing, and you could lose your rights if you don’t speak up quickly.
You may need to advocate for yourself or work with a professional who can do so if you don’t want to lose out on your right to repayment.