What to do when you receive a Notice of Bankruptcy? Step 4: What is your liability?

In our previous posts in this series you should have already identified why you received the Bankruptcy Notice and what the deadlines are that might apply to you.  In order to determine whether you should take any action related to this Notice, you now need to determine what you may have to lose.

If you are a creditor and you take no action, the debt owed to you may be discharged.  In most cases, there is nothing a creditor can do to prevent the discharge, especially in a no-asset case.  The right of the debtor to file for bankruptcy trumps your right to be paid by the debtor.  However, there are some examples where taking action can result in payment (or at least non-discharge of your debt).  Some examples where you may be able to prevent discharge of your debt, or all debts, is when the debtor committed fraud, when the debtor is trying to exempt property that should not be exempted, or when the debt is secured or otherwise protected from discharge (these are just some examples and is not intended to be an exhaustive list).

In any case where a creditor can prevent discharge, they are usually required to take some action to notify the court of their dispute and enforce their rights.  For example, in the case of fraud, the creditor must file an adversary proceeding challenging the discharge of that debt based on fraud.  In each individual case, you will have to determine if the value of preventing discharge of the debt is greater than the cost of enforcing that right.  In many such cases the creditor may reach settlement with the trustee regarding payment.

There are also situations where a bankruptcy may affect your liability, but there is nothing you can do about it.  For example, many codebtors will be affected by the bankruptcy of the debtor but have little rights to challenge the bankruptcy, because their liability is due to their own agreement with the creditor and they have no separately existing rights against the debtor.  This is often the case when one spouse, or ex-spouse files for bankruptcy.  Bankruptcy can have a major affect on debts owed by both spouses, and therefore property division, but if the divorce agreement doesn't appropriately address this possibility, the non-debtor spouse may have few or no options.  For more information about cosignors or the interplay of divorce and bankruptcy you may want to review these other posts:

I am the primary borrower on a loan and my cosigner has filed for bankruptcy. What should I do to protect myself?

I co-signed a loan and the primary borrower has filed for bankruptcy. What should I do to protect myself?

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #4: Jurisdiction over Your Assets

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #3: Jurisdiction over Your Debts

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #2: Domestic Support Obligations

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #1: The Automatic Stay

Once you've identified your exposure in a bankruptcy, the last step is to determine if you need help in limiting that exposure.  Should you hire a bankruptcy attorney to help you evaluate your claims? 

What to do when you receive a Notice of Bankruptcy? Step 2: Are you a creditor?

If you receive a Notice of Bankruptcy you need to determine why you received the Notice. You might be a creditor, an interested party, or a codebtor.  Creditors are not the only ones who receive a bankruptcy notice, and even if you're not a creditor you may have an interest in what happens in this bankruptcy case.

The Notice will not tell you why you received it.  A sample notice, shown below, doesn't have your name anywhere on it.  It does, however, have the name of the debtor and the case number.  These two pieces of information should help you determine whether you are a creditor or some other interested party.

The Debtor, whose name is listed on our sample notice above as Sample Debtor, is the person who has asked the bankruptcy court for relief with their debts.  If you are aware of a debt that the debtor owes you then you are a creditor and you should review the other information within that Notice.  As a creditor you have certain rights that may include filing a Proof of Claim and attending the Meeting of Creditors.

If you're not sure if the debtor owes you money, then you might be a creditor or you might be something else, such as a contingent creditor, a co-debtor, or simply an interested party.  To determine why you received this Notice, you must look at the schedules.  The Bankruptcy court documents are public record and may be reviewed at the court or online if you have a Pacer access account.  If you need help accessing these files any bankruptcy attorney will have an online account access and be able to look up the case file online.

Once you have access to the file, you will want to review the Bankruptcy Petition and Schedules to figure out where your name appears.  If you are a creditor then your debt should be listed in one of the Schedules of Creditors.

If you are not a creditor you may still have an interest in the bankruptcy proceedings for some other reason.  For example a codebtor (someone who is also responsible for a debt that the debtor owes) could be left being wholly responsible for a debt if the debtor is discharged of that debt.  You might be a codebtor if you cosigned for a loan for the debtor, or if they cosigned for a loan that you took out, or if you borrowed money together for any reason (such as co-owners of a house with a mortgage).  Codebtors are listed on the Schedule of Codebtors.

If you are not a codebtor or a creditor then your name may still appear somewhere else in the schedules, identifying why you received the Notice.  For example, you may receive a Notice of Bankruptcy if you have a lease or other contract with the debtor, even if they are not behind on their payments.  Reading all of the schedules carefully should help you discover why you received the notice, whether you are a creditor, codebtor or some other interested party.

Once you identify why you received the Notice, you can begin to evaluate what type of action you should take.  For example the Notice tells creditors what many of their rights and obligations may be.  The next step, therefore, is to identify: What are the important dates and deadlines I should keep in mind?