The Effect Of Bankruptcy On Creditors

A creditor is defined by the bankruptcy code as an "entity" which holds a "claim" against the debtor which arose before the commencement of the bankruptcy case. A "claim" is broadly defined by the bankruptcy code to include a right to payment whether reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.

An "entity" includes an individual, partnership, corporation, estate, trust, governmental unit and the United States Trustee.

Under these definitions, a creditor includes mortgagees, secured creditors, unsecured creditors, equipment lessors, real property lessors, franchisors, and other persons who may have a claim against the debtor.

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One of the most significant impacts of a bankruptcy case on a creditor is the automatic stay. The automatic stay provides the debtor some breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor's property. Those who acted first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally, based upon the type of creditor that they are. A race of diligence by creditors for the debtor's assets is prevented.

The scope of the automatic stay under the bankruptcy code is broad. It stays the commencement or continuation, including the issuance of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the bankruptcy case. All proceedings are stayed, including arbitration, many license revocation, administrative and judicial proceedings even if they are not before governmental courts or tribunals.

The automatic stay prohibits the execution by a judgment creditor of the debtor to obtain property of the debtor.

The stay is not permanent. There is adequate provision for relief from the stay in the bankruptcy code. A creditor may obtain relief from the automatic stay under certain circumstances by requesting such relief from the bankruptcy court.

Relief from the automatic stay may be granted a creditor on the grounds that there is a lack of adequate protection of an interest in property (such as a bank's mortgage on the debtor's property). For example, if a creditor has a security interest in an automobile used by the debtor, the creditor lacks adequate protection of its interest if the automobile is depreciating in value due to the passage of time and use of the vehicle and the debtor is not providing the creditor with compensation for that depreciation.

Of course, the information in this article is general only. If you have more questions, I suggest you consult an attorney that practices bankruptcy.