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Litigating to Protect Your Rights as a Creditor

Collecting a debt is often not as simple as the debtor paying what they owe in full and on time. A debtor may breach the terms of their agreement and not pay their debt for many reasons. The creditor is then faced with deciding how best to collect what they are owed.  One option for the Creditor is to pursue payment of their debt through the Courts. Even then, the process is not necessarily straightforward.

First, the creditor can directly litigate against the debtor to try to collect the debt. They can file a lawsuit to obtain a judgment on which they can collect either through payment by the Debtor or the sale of assets of the Debtor.  A judgment may be obtained whether the debt is secured or unsecured.

Creditors Can Litigate During Bankruptcy

Creditors’ rights are often an issue when the debtor declares bankruptcy. The creditor even has the right to force the debtor into an involuntary bankruptcy in certain scenarios. If a creditor has already filed a lawsuit in state or federal court to collect the debt, it will be frozen during the pendency of bankruptcy by the automatic stay under the Bankruptcy Code.  The debt will then be addressed through the bankruptcy process. Once the debtor files for bankruptcy, the creditor cannot commence or continue any litigation without an order by the Bankruptcy Court lifting the automatic stay for the creditor’s debt.

A creditor is an interested party, and they have the right to litigate during the bankruptcy process, especially when the debtor is doing something that could jeopardize the bankruptcy estate’s property and the creditor’s ability to be paid. Although bankruptcy litigation is not common, it is an option available to the creditor to protect their rights. Litigation in an open bankruptcy is more likely in larger bankruptcy estates where there are assets available.

The creditor may file a lawsuit in bankruptcy court when they suspect that the debtor has fraudulently transferred assets out of their own name, either right before or during the bankruptcy. Alternatively, a creditor may seek relief from the Bankruptcy Court if that Creditor believes the debtor is wasting assets. It is in the creditor’s interest to preserve the bankruptcy estate because that money may be used to pay creditors, even if it is pennies on the dollar. If the creditor wishes to litigate during bankruptcy, they must file the claims through the bankruptcy court, or else they risk violating the automatic stay.

Reasons Why a Creditor May Litigate to Protect Their Rights

The creditor may also object to the debt discharge that is given at the conclusion of many bankruptcy cases. As a creditor, you may have grounds to object to the discharge if you suspect the following:

  • The debt was incurred through fraud or misrepresentation
  • The creditor used credit to pay debt that is otherwise not dischargeable during bankruptcy
  • The debtor bought luxury items right before or during the bankruptcy that are not necessary for the support of the debtor or their dependents.
  • The creditor believes the debt is not dischargeable during bankruptcy
  • If the trustee is trying to use their strong-arm power to claw back assets that were paid to a creditor

Creditors may even have a limited right to sue other creditors in order to protect their own interests. Case law draws a very fine line as to when creditors can file legal actions against other creditors. If a creditor suffers a particular injury due to another creditor’s actions (and not one that is suffered by all other creditors), they can directly sue that other creditor. Otherwise, the trustee would file the action against the creditor on behalf of the bankruptcy estate.

Contact a North Carolina and South Carolina Creditor Litigation Attorney Today

If you are a creditor, you will need an experienced creditor litigation attorney to ensure that you can protect your own rights through litigation if and when it is necessary. Contact the experienced attorneys at Crawford & von Keller to learn more about your legal options. Call 803-790-2626 to schedule an appointment to speak with an attorney.

Litigation to Protect Your Rights as a Creditor

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