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Unsecured Creditors: Know Your Rights

Unsecured Creditors: Know Your Rights

One of the main roles of bankruptcy trustees when managing a bankruptcy case is to ensure that the creditors’ claims are repaid as much as possible before a debtor’s debt is discharged. Creditors have the right to a hearing when it comes to liquidating the debtor’s non-exempt assets for a Chapter 7 bankruptcy.

Creditors also have the right to be heard in regard to a debtor’s Chapter 13 repayment plan. This means the creditor has the right to challenge whether or not a debtor has the right to discharge the debt(s).

In a bankruptcy case, not all creditors are treated with equal regard. However, all creditors can receive payment from the bankruptcy estate according to the priority of the debt.

Bankruptcy law tends to favor secure claims and claims that take priority, like child support. Secured claims are claims in which a consumer has to offer collateral to secure the debt. This means the creditor can take or sell the collateral if the debtor makes late payments or is unable to make payments.

What Rights Do Creditors Have for Secured Claims?

In general, secured creditors do have rights based on a mortgage, security agreement, or deed of trust. Creditors can also obtain rights through a lien from the courts. If a creditor has a lien on a property, the creditor has the right to receive the value that is equal to the collateral or the amount of the debt — whichever is less.

The creditor also has the right to prevent a debtor from using cash collateral to get money from the trustee’s utilization of a secured property that reduces its value, along with lawyer fees and interest that accrue as a result of a bankruptcy case.

What Are the Creditor’s Rights for Unsecured Claims?

When a creditor has a lien, the creditor has the right to the value of the collateral or debt (whichever is less). However, an unsecured creditor doesn’t have these same privileges. In most cases, unsecured debt like credit card or medical debt is not given high priority in court.

Unsecured creditors can file a proof of claim and attend the initial meeting of creditors. Unsecured creditors can also object to the debt discharge. If you are an unsecured creditor, you can access bankruptcy files to assess the accuracy of the claim.

Sometimes, unsecured creditors can also obtain approval from the courts to take the deposition from the debtor to ensure that as much of the debt is repaid as possible, considering the debtor’s other debts and assets.

A number of unsecured creditors are not paid in Chapter 7 bankruptcy and may not have the right to payment in Chapter 13. However, this depends on how many secured and priority debts the debtor has incurred.

Attempting to Settle a Debt Before Bankruptcy

In some instances, a bankruptcy trustee will get in touch with a creditor to request that the creditor return funds the debtor paid before filing bankruptcy. According to the bankruptcy code, a debtor is not permitted to favor one creditor over another.

If payments are made on a previous debt in the 90 days before a bankruptcy is filed, the bankruptcy trustee can recover the funds unless the creditor has a valid defense.

Payments that the debtor made to family or friends to satisfy a personal debt can be recovered if the payments were made within a year of the bankruptcy filing date.

ASK LLP attorneys, a nationally recognized attorney group specialized in bankruptcy matters, can assist you if you owe a debt to an unsecured creditor. A lawyer will let you know which payment terms you should adhere to and how you can dispute charges to restore your credit.


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by Mark Scott // With a law degree under his belt and years of experience, Mark Scott set off to make the law more accessible to all. He decided to help people lost in the maze of legal terminology to find their way. Mark writes clear and concise pieces and gives simple advice that is easy to follow. On account of positive feedback from readers, he decided to dedicate more of his time to this goal and became a legal columnist. In his writings, Mark covers a wide array of topics, like how to seek legal counsel, or how to deal with different procedures. Furthermore, he directs his readers toward other trustworthy resources for more in-depth information.

Opinions expressed by contributors are their own.