A “creditor” in terms of bankruptcy is any person that has a claim. Under the bankruptcy code, the definition of a “claim” is very broad and includes any right to payment or equitable remedy whether or not such right is reduced to judgment, liquidated, contingent, matured, or disputed.  The claim itself may be secured, unsecured (or treated as secured in part and unsecured in part), or entitled to certain priority treatment under the bankruptcy code.  Depending on the type of bankruptcy that a debtor files, a creditor may file a “Proof of Claim” indicating the type of claim and also the amount of the claim.  If a claim is unliquidated (no final amount owed has been determined) or disputed, the creditor may file an adversary action in bankruptcy court to litigate the claim.  If litigation is ongoing at the time the bankruptcy petition is filed, the creditor may ask the bankruptcy court to allow the proceedings to continue to determine the amount of the claim that is disputed.

Once a debtor files any type of bankruptcy, the debtor is afforded an automatic stay.  This means that no creditor may take or continue an action against a creditor without requesting that the bankruptcy court give the creditor permission to do so (or lift the stay).  If a creditor is involved in litigation in any court against the debtor and that debtor files bankruptcy, the creditor needs to cease litigation until the creditor is given permission by the bankruptcy court to proceed.  There are penalties for violating the automatic stay provision of the bankruptcy code.

Unsecured Creditors are those creditors that have no security interest in the debtor’s property to ensure payment of the debt (for example, credit card companies are typically unsecured creditors).  In Chapter 7 and Chapter 13 bankruptcies the bankruptcy court sets the deadline for the filing of Proofs of Claim.  Normally, when the bankruptcy court notifies creditors of a bankruptcy the notification will state what the creditor needs to do to protect a claim, if anything.  Depending on the type of bankruptcy and the assets of the debtor, unsecured creditors are paid pennies on the dollar or nothing at all.  If a claim is unliquidated or disputed, the creditor may file an adversary action in bankruptcy court to adjudicate the claim.  However, given the position of unsecured creditors the unsecured creditor should consider the cost of adjudicating the claim vs. the possibility of payment.  In some instances certain types of debt are not dischargeable in any type of bankruptcy.  Spousal maintenance, child support payments and taxes are automatically nondischargeable and the debtor must pay them no matter what the outcome of the bankruptcy.  Other debts that are not dischargeable are those that arise from an intentional or fraudulent act of the debtor.  If a creditor believes that the creditor’s claim is not dischargeable, the creditor would need to file an adversary action with the bankruptcy court.

A creditor is considered a secured creditor if the debtor has executed a written voluntary lien against the debtor’s property, whether real or personal.  For example, any party holding a UCC-1 against personal property or a Deed of Trust (mortgage) against real property would be a secured creditor in a bankruptcy proceeding.  Secured claims may accrue post-petition interest, attorney’s fees and costs whereas unsecured claims may not.  However, interest, attorney’s fees, and costs are only allowed on a secured claim to the extent of the value of the collateral and only if they are pursuant to a written agreement regarding the secured claim (for example, the deed of trust allows for interest and attorney’s fees in the event of default).

Secured Creditors may also reclaim its collateral in some instances.  At the time a bankruptcy petition is filed, any property, secured or not, becomes part of the bankruptcy estate subject to the automatic stay provisions of the bankruptcy code.  However, a Secured Creditor may request that the automatic stay be lifted so that the Secured Creditor may proceed with the sale of property (for example, to proceed with a foreclosure on a deed of trust). 

Chapter 7 bankruptcy is available to individuals as well as businesses.  Under the bankruptcy code a “person” for the purposes of filing bankruptcy is defined as an individual, partnership, and/or corporation.  A Chapter 7 bankruptcy requires the collection of the debtor’s non-exempt property for sale or liquidation and the cash proceeds from the sale is paid on a pro rata basis to creditors with claims against the estate.  Within 40 to 60 days after the filing of a Voluntary Petition for Chapter 7 bankruptcy, a meeting of the creditors occurs.  The debtor must be present at the meeting of the creditors, but creditors need not appear to protect their claims.  Chapter 7 bankruptcy generally eliminates a debtor’s debt and unsecured creditors generally receive no or minimal payment for their claims.  Secured creditors continue to be paid in full if the individual wishes to keep the secured property.  If the individual does not want to keep the secured property, the individual may return the secured property/collateral (for example, a vehicle or house).  Once the secured property is returned, the secured creditor may take no further action against the individual for collection.  The return of the property is considered full and final payment no matter how much is owed and no matter how much the property is worth. 

Like a Chapter 7 bankruptcy, any person (individual, corporation or partnership) may file a Chapter 11 bankruptcy petition.  In a Chapter 11 bankruptcy the debtor typically remains in control of the business and the property of the bankruptcy estate as the “debtor-in-possession”.  The debtor-in possession is an official title with the bankruptcy court and requires the debtor to assume the duties, responsibilities and powers that a trustee would in the administration of an estate.  In a Chapter 11 bankruptcy, the Debtor is granted 120 days from the date of filing a Chapter 11 petition in which to propose a plan for reorganization of its debt and/or business.  The plan details what the Creditors will be paid, how much they will be paid, and when.  The creditors have the right to reject or accept the Plan.

Chapter 13 bankruptcy is designed to restructure the debts of an individual.  In a Chapter 13 bankruptcy case, individuals file a Plan to repay some or all of their debts over a period of time (usually 60 months).  The amount that must be paid to creditors is determined by an individual’s specific income and expenses.  When individuals file a Chapter 13 case, they will begin to make one monthly payment to the Chapter 13 trustee as determined by their Plan.  The trustee will distribute the payment to the creditors.  Once all of the Plan payments are made, the individual will be granted a discharge.