Someone owes me money and they just filed a chapter 7 bankruptcy. What do I do?

(Note: I don’t represent creditors. This gives a few quick notes to let you know what’s going on when you have a debtor who owes you money and files bankruptcy).

In most cases, when someone files bankruptcy, it’s a simple chapter 7 bankruptcy, and they have nothing available to pay creditors.  Do not keep calling them:  if you do, their attorney may sue you for bankruptcy sanctions!

Almost all debts are discharged, or wiped out, by a chapter 7 bankruptcy.  The debts usually fall into the following categories:

Priority debts (these survive bankruptcy):  child support, alimony, taxes, student loans, and criminal restitution.

Large secured debts:  like mortgages and car loans.  If you are in the business of giving out these types of loans, hopefully you have your own collections attorneys who can advise you.

Small secured debts:   like installment loans on a refrigerator or a tv.  If a debtor stops paying you, you have the right to repossess the collateral.  The bankruptcy may wipe out the money he owes you, but you have every right to repossess the collateral.  That being said, please contact debtor’s counsel to make arrangements.  You can’t contact the debtor directly, and if you try collecting on him or repossessing at the wrong time, his attorney can sue you for sanctions for violating the bankruptcy stay.

Possessory liens:  if you are a pawn shop and someone has pawned their wedding ring to you, you don’t have to return it to them until you are paid.  You have a lien and you possess the collateral.  If you are an auto body shop and just did a $2,500 transmission rebuild, you have a possessory lien on the car so long as it is on your lot.  You don’t have to release it until you get paid.

Everything else:  Any other debt is simply wiped out, and you can’t do much about it.  Everything else includes credit cards, leases, cell phone contracts, utilities, loans for lunch money, most personal injury claims, most lawsuits, etc.

About a month after they file, there will be a 341 Meeting of Creditors with a bankruptcy trustee.  You are allowed to attend this meeting, but it is usually pointless and frustrating unless you want to tell the trustee about the secret home in the Cayman Islands that the debtors did not disclose when they filed bankruptcy.  The trustee will determine whether or not there are any assets for him to recover.  If he can recover assets, he’ll send you a Request to Submit Claims.  You can file a claim with the court, and he may pay you anywhere from a penny on the dollar all the way up to your full claim, depending on how much money he could recover for the bk estate.

It is generally a waste of money to hire an attorney.  The debtors filed bankruptcy, and there is nothing left for you to go after.

However, you can file something called an adversary proceeding against the debtors to argue that your debt is a special one based on fraud.  If you win this bankruptcy court suit, then the debt won’t be discharged.  They still won’t be able to pay you back, but you’ll have the moral victory of having your debt survive bankruptcy.  Unfortunately, this is a costly suit, and it is almost never worth it financially.

To put it simply:  if they filed bk and you don’t have a secured loan, you are probably S.O.L. (this is Utah, and that stands for “Sorely out of luck.”).  The only consolation is that you may have a loss to write off on next year’s taxes.

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