When you file for bankruptcy relief, the court sends notice of your case to all creditors listed on your petition. Read on to learn more about what happens when creditors receive notice of your bankruptcy.
The moment you file your bankruptcy case, an automatic stay goes into effect. The stay prohibits almost all creditors from initiating or continuing any collection activities against you. A creditor cannot call you, send you collection letters, file a lawsuit, or otherwise attempt to collect its debt from you.
However, keep in mind that under certain circumstances a creditor may have grounds to ask the court to lift the automatic stay. Secured creditors, such as your mortgage or car loan company, often file motions to lift the automatic stay. The grounds tend to be failing to make your regular loan payments during bankruptcy to the creditor's detriment.
When money is available to distribute—which isn't always the case—the bankruptcy notice will include a deadline by which the creditor must file a proof of claim. Funds are typically available in "asset" Chapter 7 cases (as opposed to "no-asset" cases) and in Chapter 13 matters. The creditor will include the amount and type of debt on the proof of claim form, along with a contract or other supporting evidence.
After reviewing the claims, the trustee will distribute the funds according to the priority bankruptcy claim rules. The priority rules dictate that attorneys' fees, domestic support obligations, and recent taxes go to the front of the line. Debts without priority standing, such as credit card balances, medical bills, and personal loans, share in whatever funds remain.
The bankruptcy notice tells creditors the time and location of your meeting of creditors (also called the 341 hearing) that every bankruptcy debtor must attend. The hearing allows the bankruptcy trustee and your creditors to examine your financial affairs under oath.
Despite its name, creditors rarely attend the meeting of creditors. Creditors have an opportunity to review your bankruptcy petition and schedules when you file your case. Unless a creditor believes that you are hiding assets or lying on your bankruptcy papers, it does not have much to gain from attending the 341 hearing. However, even if a creditor does not participate in the meeting of creditors, it can still file an objection to your discharge.
Learn more about the trustee and bankruptcy hearings.
Failure to attend the 341 hearing does not eliminate a creditor's right to object to your discharge. Most objections to the bankrupt discharge involve debts:
A creditor must file an adversary proceeding (a lawsuit) in your bankruptcy and prove why the court shouldn't discharge the debt.
The laws and procedures involving objections to discharge and adversary proceedings can be extremely complicated. As a result, if you are facing an objection to discharge, consider talking to a knowledgeable bankruptcy attorney in your area to discuss your options.