The Role of Bankruptcy in Creditors’ Rights and Collections

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Bankruptcy is a highly time-sensitive process. Creditors must exercise their rights in bankruptcy proceedings within strict deadlines set by the Court.

Bankruptcy law serves three primary purposes: to solve a collective action problem among creditors, to give individual debtors a “fresh start,” and to promote the saving of going-concern value by reorganizing rather than liquidating firms in financial distress.

Creditors’ Rights

Creditors have certain rights when someone to whom they loaned money fails to repay the debt. These creditors rights & collections are outlined in laws such as the Fair Debt Collection Practices Act and the Bankruptcy Code, which governs bankruptcy proceedings.

A creditor’s responsibilities may include:

  • Pursuing legal action to collect on the debt.
  • Filing a lawsuit against the borrower.
  • Ensuring they stay within the confines of the law when attempting to recover an outstanding debt.

Creditors can also file an objection to a debtor’s bankruptcy plan to argue for changes.

Secured creditors, whose loans are backed by collateral, receive priority in bankruptcy. However, they might receive less than their initial claim because of the order of repayment set by the bankruptcy code. Unsecured creditors, including credit card companies, are low on the priority list and might receive little or nothing from the bankruptcy estate. 


Whether they file Chapter 7 or 13, bankruptcy gives people and businesses a chance to start over by discarding debt and creating a repayment plan. Creditors aren’t typically involved in these cases unless they have collateral securing their claim (such as a top-of-the-line appliance, living room furniture, or gold and diamond jewelry) or if they want to be paid for the goods and services they provided to you before your bankruptcy was filed.

Bankruptcy also puts a stop to all collection actions and provides permanent relief through something called the “discharge.” It legally eliminates your creditors’ rights to pursue those debts. If a creditor violates this injunction by trying to collect a discharged debt, they can be fined. In addition, bankruptcy stays on your credit report for several years, making it difficult to get further credit. That’s why it is essential for anyone considering bankruptcy to weigh all of their other options, including a debt management program or renegotiating with a creditor.


Bankruptcy is a legal proceeding that gives individuals and businesses a fresh start by discarding debt and creating a plan to repay debts. The bankruptcy process is handled in federal courts by bankruptcy judges and trustees under the laws of the United States Code. Bankruptcy can help people with various situations, including divorce, medical bills, and poor financial decisions.

In a Chapter 7 bankruptcy (or liquidation bankruptcy), a trustee takes over your property and sells it to pay your creditors. You may be able to keep some property that the law calls “exempt.”

A Chapter 11 bankruptcy (or reorganization bankruptcy) lets a business or company stay alive and propose a plan to repay creditors over several years. A Chapter 13 bankruptcy (a debtor’s rehabilitation bankruptcy) helps people fall behind on their mortgage or car loan.


Creditors are likelier to lend money or extend credit to people with stable employment and a steady residence. In contrast, people with unstable incomes and unsteady housing often need help getting new loans or obtaining rental units. That is because landlords frequently check credit references to determine whether a prospective tenant is a reliable renter.

Bankruptcy helps people whose financial situations are beyond their control get relief from debts they can’t pay. It also allows creditors to get paid for a person’s assets.

The most important part of bankruptcy is the discharge, eliminating the debtor’s legal obligation to pay a specific type of debt. It immediately stops most creditors from pursuing collection actions against the debtor. The Court may also set up meetings with creditors, called a “creditors’ meeting,” but the debtor does not have to attend. The trustee can also challenge the rights of creditors to claim more than they are legally entitled to.

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