I am not a lawyer. This is my opinion and a summary of what I have learned and observed. If you need legal advice, contact a lawyer. (Especially in bankruptcy issues.)
Bankruptcy is a set of federal laws. These laws allow (and sometimes help force) debtors to petition and be declared (judged) insolvent. This means the debtor owes more than they have the ability to repay.
Any (known and non-exempt) property of the debtor is turned over to a Trustee. After court proceedings and hearings, the Trustee distributes shares of the debtor's non-exempt assets (if any) to the debtor's creditors.
The most important thing a declaration (an attempt) of bankruptcy does is to create an automatic stay. The automatic stay stops all creditors from all attempts to collect from the debtor. (At least until the creditor gets permission from the court to resume collection from the debtor.)
The most important thing a successful bankruptcy does is discharging (wiping out) most or all of the debtor's debts (including most Judgments).
It does not matter how you learn about the filing of bankruptcy of your debtor. You must immediately stop all collection actions - and also undo any recent collection actions you started. As an example, if you were levying the wages of your debtor, and then learned they filed for bankruptcy. You must inform the sheriff (and employer) to stop the current wage levy.
Another thing to be aware of is the take-back power a bankruptcy court can assert. An example is if a debtor pays you $10,000 - then (less than 90 days later) goes bankrupt. There is a chance the bankruptcy court will demand the $10,000 back from you. Often this is not fair, but this prevents one way a debtor can defraud the court.
Bankruptcy is serious, and kills most Judgments. Some Judgments are not killed, but you still must pay time and money to keep your judgment enforceable.
Most of the time the "cards are stacked" in the debtor's favor. Just one example is, the debtor can choose any place in the USA to declare bankruptcy - even if it's only to make it harder for creditors. If you want to change the odds and outcome, you have to pay a lot to "re-shuffle the deck of cards".
Most bankruptcies are because of honorable reasons, including loss of jobs, medical bills, etc. Some bankruptcies are for less honorable reasons, including avoiding paying judgments, as a delay tactic, to avoid paying for things, or instead of defending themselves in lawsuits.
There are three kinds of debtors:
A) Those that are really broke.
B) Those that are hiding assets, but are pretending to be broke, to delay and frustrate creditors.
C) Those that are flagrantly abusing bankruptcy laws to play games such as serial filing (filing often, just to delay, knowing their bankruptcy won't be approved), or lying to the court about their financial situation. Once in a while the court throws the book at frauds, putting them in prison.
Unfortunately, simply pointing out hidden assets to the court sometimes results in the Trustee saying, "so what?".
I have seen a debtor claim a consistent $10,000 monthly cost of living, for years before a bankruptcy, without any proof or hints about where their income was coming from. When challenged, the debtor simply said "that's why I went bankrupt". The Trustee had no interest in discrepancies of cash flow on their paperwork.
When debtors are dishonest, such as in cases B and C above, it usually requires an expensive lawyer to convince the court that your Judgment should not be wiped out by the debtor's bankruptcy. If you succeed, perhaps the debtor may only owe you, with all the other creditor's debts being discharged.
A common misconception is that a Judgment for fraud, is bankruptcy-proof. The truth is a fraud Judgment can be declared bankruptcy-proof only through expensive legal procedures.
There are two kinds of situations:
A) The debtor is really poor, it's best to give up.
B) The debtor has assets (or hidden assets you can cause to be found), it might be worth fighting the bankruptcy, usually by hiring a lawyer.
You have two choices, you can pay attention, or not. If the debt owed you is less than $10,000 and/or the debtor is poor, it's best to just let it go. However, you still may want to pay attention to the situation, in case the debtor's bankruptcy filing does not succeed.
If the debtor is not poor, then you should pay attention, and decide what to do. If you have a Judgment for fraud, and the debtor has assets, you should pay close attention, and consider hiring a lawyer.
The cheapest and best way to pay attention to the debtor's bankruptcy situation is PACER. PACER is a federal government court web site. You can find PACER with a simple web search. To use it, you must register with them.
PACER is not free, but it's very cheap - 8 cents a page. This means when you click the details of the bankruptcy, it costs 8 cents per displayed page. The best way to find your debtor is by their social security number.
If it's a big Judgment you want to preserve the rights to enforce, you might want to click and save as a PDF, all the information about the case from PACER. If it's a small Judgment, or you want to check often, like once a week, just click their Summary or Status pages.
There are many conclusions a court can come to, after a debtor files for bankruptcy. A common conclusion is a DISCHARGE - which means the debtor succeeds in discharging (wiping out) most or all of their debts and Judgments. This is not good news for creditors.
Sometimes good conclusions (for the creditor) can happen in a bankruptcy. One good conclusion for the creditor is a DENIAL OF DISCHARGE - which means the debtor was caught lying, or has otherwise annoyed the court.
Another good conclusion for the creditor is a DISMISSAL - the court said no to the debtor. Perhaps the debtor was not entitled to bankruptcy protection, or made a mistake, or failed to perform what the court required.
PACER is the best way to look at the status and conclusions of a bankruptcy. If a bankruptcy is Denied or Dismissed, generally you are free to resume collections on the debtor. If you are in doubt, get legal advice.
There are four types of bankruptcy, known as Chapters:
Chapter 7: is most common form of bankruptcy, there are two types - Assets, and No-Asset. No-Asset is when the debtor claims and the court agrees, there are no assets to repay creditors. Unless you can prove fraud or hidden assets, No-Asset usually means give up, it's over. But keep track using PACER to check the final outcome of the bankruptcy.
Chapter 11: This is available to businesses when there are some assets available to pay debtors - a percentage of what is owed.
Chapter 12: This is for farmers.
Chapter 13: This is for people with income and assets, with a payment plan to partially repay creditors over time, usually 3 to 5 years.
Bankruptcy is serious, and PACER is your friend. Even if you have to hire a lawyer, you can save money if you are familiar with PACER. A web site I am not affiliated with, but find useful bankruptcy information, is at http://www.MoranLaw.net.
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