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How to get money back after debtor declares bankruptcy

If you run a successful company, you likely do business with people who have the misfortune of not being as successful as you. In some cases, that means that person owes you money and has declared bankruptcy.

Does that mean you're out of luck when you try to recoup your debt? Not necessarily. There may be ways for you to get some or all your money back.

The first question is whether your debt is secured or unsecured. This will determine how you go into bankruptcy proceedings. If you are owed a debt secured with, say, a title to a car, then you can ask the court to recover that security. However, if your debt is unsecured then you will normally need to make sure liquidation is complete by the trustee.

Chapter 7 or Chapter 13?

The next question is whether the debtor has filed for protection under Chapter 7 or Chapter 13. Under Chapter 7 protection, most of the debtor's assets are liquidated to pay off debts. Under Chapter 13 protection, the debtor's assets are reorganized to pay back the debt - usually within three to five years and at less than the full value.

At the beginning of bankruptcy proceedings, if there are assets in the estate or if it is a Chapter 13, the court will send a "proof of claim" to all known creditors. The creditors fill out the form stating how much they are owed. Failure to return the "proof of claim" before the deadline - usually 90 days - means you won't be in line to get your debt paid.

Objection to debtor's exemptions

Next, the debtor lists assets and where they belong under certain exemptions. Sometimes debtors will try to sneak valuable assets through bankruptcy proceedings by misstating their worth. The assets could be property, but they could be businesses, stocks or anything that has worth. If you see that some of the debtor's assets are undervalued, then you can file an "objection to debtor's exemptions" in which you dispute the list of exempted items.

If the debtor filed for Chapter 13 bankruptcy protection and you disagree with the amount you are being repaid or the timeliness of the payments, you may want to file an "objection to the Chapter 13 plan" in which you dispute the debtor's plan.

Both these objections have deadlines, as do all aspects of a bankruptcy. When faced with unpaid debts, it's important that you have all the information you need to protect your interests and your cash flow.

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