Bankruptcy is treated seriously because it is based on federal laws that are strongly enforced. Bankruptcy takes place in Federal courts, and Federal laws outrank state and local laws. When you learn, from any source, that your debtor has filed for bankruptcy protection, you must immediately stop all collection activities. You must not do anything to recover that debt until you get written permission from the bankruptcy court, which is not automatic and usually does not happen.
If a debtor's bankruptcy is approved, most or all of their judgments and debts are discharged. This means the debts are wiped out, and creditors cannot collect on them. Usually, when your debtor files for bankruptcy protection, it is game over.
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This article is my opinion, and not legal advice. I am a judgment broker, and am not a lawyer. If you ever need any legal advice or a strategy to use, please contact a lawyer. Sometimes the debtor's bankruptcy attempt fails, and their bankruptcy is denied or their case gets dismissed. If you are lucky, what is owed to you gets declared non-dischargeable, which means you can resume collecting your judgment debt. If your debt is declared non-dischargeable, that is good because the other creditor's debts are wiped out, and you can again try to recover your judgment.
Many do not fully understand "bankruptcy proof" judgments. Just because you have a judgment for fraud, does not mean it will survive your judgment debtor's bankruptcy filing. My understanding is, in BK cases, one must bring their claim of non-dischargeability to the attention of the bankruptcy court, which usually means paying a lawyer, to attempt to keep the judgment alive.
If you have a default judgment for fraud, most bankruptcy courts will require a motion for a new summary judgment to again decide the fraud, adding more expense for the creditor. So, you must prepare, plan, and pay to preserve your fraud judgment when your debtor files for bankruptcy.
What should you do when you find out your judgment debtor has filed for bankruptcy? First, stop all collection activities. If you have requested the Sheriff to levy the debtor's assets, call, and then fax or mail notice to the Sheriff that your debtor has filed for bankruptcy protection.
If the judgment debtor's money has already been levied, the Sheriff usually holds the funds until the bankruptcy case concludes. If the bankruptcy trustee asks for the money, it should be sent immediately. If nobody asks for it, and the debtor's bankruptcy is finished, sometimes the creditor is sent the money previously seized by the Sheriff.
What to do when your judgment debtor files for bankruptcy, depends on your debtor. If they are poor, it is best to give up. If they are rich and clever and are hiding their assets, and you can afford to, you might want to hire a lawyer to bring the fraud to the bankruptcy court's attention with an adversarial motion.
Simply hinting of fraud, is not enough, you must demonstrate proof of the fraud. Many bankruptcy court trustees often say "so what". For example, when you or your lawyer say, "Your honor, here is evidence the debtor did not report this bank account". Usually, the judge will ask the trustee for their opinion, and that is when one often hears "so what".
Bankruptcy trustees do not get paid enough, and fraudulently concealed assets must be big to get their interest. Usually the reward for one creditor bringing in new undeclared assets, is that new asset is added to the bankruptcy pie and split among all the other creditors.
There are two kinds of creditors in bankruptcy court, unsecured and secured. Unsecured is when there is no collateral or secured liens on the debtor's assets. Secured creditors either have a written guarantee made by the debtor, or a lien recorded; long before the judgment debtor filed for bankruptcy.
Not every debtor that says they will file for bankruptcy actually files. It would be a shame to skip a chance at recovering judgment money if your debtor never did file or stay in bankruptcy. While you could ask your judgment debtor to give you the bankruptcy trustee's phone number so you can call them, it is better to get a PACER account.
PACER is the federal government's web site that records almost everything that happens in any federal court proceeding, including bankruptcy. You can access PACER on the web. Although PACER requires a check or credit card to get an account, PACER is free if you do not use it much. PACER shows if your judgment debtor filed for bankruptcy, and you can see their filings, and will know if their bankruptcy fails. Of course, monitoring with PACER is usually only when you know your debtor has assets.
Bankruptcy is not fair to creditors, and sometimes not fair to debtors. The lawyers and officials get paid even if the creditors and debtors lose. Usually, the debtor will add you as a creditor on their bankruptcy petition. If they did, you will get a notice from the bankruptcy court or the trustee. If they did not, and you know your debtor had assets, search on the www, or contact the trustee or the court to get a claim form. There is no fee for creditors filing claims.
There is one form for secured creditors and another claim form for unsecured creditors. Usually, secured creditors get a small chance of getting paid something, and unsecured creditors get a tiny chance of getting pennies on the dollar.
In community property states, there may be a phantom BK discharge, when one spouse files for bankruptcy, all community property is off limits, even if the other spouse never filed for bankruptcy. Bankruptcy is complex, so please consult with a bankruptcy lawyer if you have a question.
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