Businesses and individuals struggling financially may have the option of filing for bankruptcy. Bankruptcy can lead to the discharge of certain debts. It also typically halts collection activity.
The courts usually grant an automatic stay to the party filing for bankruptcy on the same day that they initiate bankruptcy proceedings. The automatic stay prevents creditors from calling, sending collection letters or moving forward with collections-related lawsuits.
Creditors often despair of their ability to pursue payments when a debtor files for bankruptcy, but continued collection efforts can sometimes be possible.
The courts can lift the automatic stay
Creditors have rights during bankruptcy, especially in cases where the debtor may have committed fraud. Some parties intentionally abuse the bankruptcy process, and their actions can provide the grounds for creditors to take legal action.
If a debtor engaged in fraudulent behavior, such as taking on debt immediately before they filed with no intention of paying what they owe, then creditors could ask the courts to review the case carefully. In scenarios involving fraud and other forms of misconduct, creditors may be able to ask the courts for relief.
Creditors can petition the courts for adversary proceedings. Essentially, they pursue a lawsuit that relates to the bankruptcy case. The courts can lift the automatic stay and can even prevent the inclusion of specific debts in the discharge granted at the end of the bankruptcy process.
Creditors hoping to pursue collection efforts despite a debtor filing for bankruptcy may need help evaluating their options. Reviewing prior collection efforts and details about the debt can help creditors explore their rights when debtors file for bankruptcy.