The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee.
Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.
The debtor is the person or business entity filing the bankruptcy case.
The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.
A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).
The debtor’s most important job is to be honest and responsive. You need to do this first with your bankruptcy lawyer, so that the lawyer can advise and protect you. Then, through the lawyer’s guidance, do the same with the bankruptcy court and the other players in the process.
The creditors are of course the businesses and individuals to which the debtor owes debts.
Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.
Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.” See Section 506 of the Bankruptcy Code on “Determination of secured status.”
Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures. See Section 507 on “Priorities.”
For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, bounced checks, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.
Creditors Getting Involved
Creditors can theoretically be involved in the bankruptcy process in a lot of ways. However, they tend to be less involved than you expect. They often decide that getting involved is not worth their cost or effort. Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”
Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts. Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.