You're an employee who has spent months trying to claim back wages that your employer owes. You finally obtain a judgment against him in state court… and he files for bankruptcy.
Or you are a homeowner who paid far too much for your home remodeling because the contractor lied to you about the cost of materials. You sue the contractor and get a state court judgment against him… and he files for bankruptcy.
Now what do you do? Bankruptcy court is bewildering enough for debtors who file, let alone the creditors. At least debtors usually understand the process before they file; creditors have this bewildering world thrust upon them. They might then hire an experienced bankruptcy attorney to navigate the process. If they receive notice of the bankruptcy, but wait too long to file a proof of claim, they could be out of luck.
So how does bankruptcy affect state court claims, and what can you do if you are the creditor?
When a debtor files for bankruptcy, an injunction is created known as the automatic stay. The automatic stay bars creditors from taking any further action to collect on a debt. Any action. If you have taken the debtor to court, even if you are in the middle of litigation, you must stop once the debtor has filed for bankruptcy. Any actions beyond that point are void.
The automatic stay lasts only as long as the bankruptcy. If the bankruptcy is dismissed before discharge, the automatic stay lifts, and creditors can pursue legal action once more. However, if the debtor does everything right and the automatic stay remains until discharge, what are the creditor's options?
1. File a Proof of Claim. If the debtor filed a Chapter 7 or 13 and you are an unsecured creditor (the debt owed to you is not secured by collateral) this must be your first step. You must file within 90 days after the first meeting of the creditors. On the proof of claim, you would include your name and address, the amount owed, the basis of the claim, and the type of claim.
If you don't file a proof of claim until after the 90 days, your claim could be disallowed unless you successfully argue "excusable neglect." Failure to file a proof of claim means you could be barred from receiving payment distributions from the trustee handling the bankruptcy.
2. File a Motion for Relief from Automatic Stay. This option can be used by secured or unsecured creditors. A secured creditor (debt secured by collateral) might request relief from automatic stay to ensure "adequate protection." The secured creditor might argue that the collateral is losing value, and the creditor must be assured that it will receive payments from the debtor. An unsecured creditor might seek relief from automatic stay for debts that won't be discharged, such as child support or spousal support payments. An unsecured creditor who is a landlord might seek relief from automatic stay to evict for the debtor tenant for failure to pay rent.
3. File an Adversary Complaint to Prevent Discharge. If you believe that the debt came about as a result of fraud or defalcation, you could have your attorney file an adversary complaint under 11 U.S.C. section 523. You would argue that because of the fraud or defalcation, the debtor should not receive a discharge for that particular debt. You might also have a claim under 11 U.S.C. section 727, which bars discharge of ANY debts. The adversary proceeding would be an offshoot of the main bankruptcy case and would proceed very much like any other litigation. If you win, the debt remains even after discharge, and you can pursue it as before.
2. File a Motion for Relief from Automatic Stay. This option can be used by secured or unsecured creditors. A secured creditor (debt secured by collateral) might request relief from automatic stay to ensure "adequate protection." The secured creditor might argue that the collateral is losing value, and the creditor must be assured that it will receive payments from the debtor. An unsecured creditor might seek relief from automatic stay for debts that won't be discharged, such as child support or spousal support payments. An unsecured creditor who is a landlord might seek relief from automatic stay to evict for the debtor tenant for failure to pay rent.
3. File an Adversary Complaint to Prevent Discharge. If you believe that the debt came about as a result of fraud or defalcation, you could have your attorney file an adversary complaint under 11 U.S.C. section 523. You would argue that because of the fraud or defalcation, the debtor should not receive a discharge for that particular debt. You might also have a claim under 11 U.S.C. section 727, which bars discharge of ANY debts. The adversary proceeding would be an offshoot of the main bankruptcy case and would proceed very much like any other litigation. If you win, the debt remains even after discharge, and you can pursue it as before.
There are other options as well, such as requiring the debtor to reaffirm the debt. However, that option is usually exercised by business creditors (such as auto retailers), rather than small individual creditors.
If you need a Bay Area bankruptcy attorney or a Contra Costa employment law attorney, contact the Wild Law Office today.
The above should not be construed as legal advice.
