getting paid, how to collect from bankrupt debtors (2003)

1st edition
Getting Paid
How to Collect from
Bankrupt Debtors
by Attorney Stephen R. Elias
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1st edition
Getting Paid
How to Collect from

Bankrupt Debtors
by Attorney Stephen R. Elias
First Edition NOVEMBER 2003
Editor ILONA BRAY
Book Design SUSAN PUTNEY
Cover Design TONI IHARA
Index ELLEN DAVENPORT
Proofreading SUSAN CARLSON GREENE
Printing ARVATO SERVICES, INC.
Elias, Stephen.

Getting paid : how to collect from bankrupt debtors / by Stephen Elias 1st ed.
p. cm.
Includes index.
ISBN 0-87337-978-0
1. Collecting of accounts United States 2. Bankruptcy United States. I. Title.
HG3752.7.U6E45 2003
346.73'07'8 dc21 2003052495
Copyright © 2003 by Nolo
ALL RIGHTS RESERVED. Printed in the U.S.A.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form
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Acknowledgments
Thank you Ilona for your scrupulous editing, Albin for your always helpful contribu-
tions and wisdom about bankruptcy, Jaleh and Susan for getting the book into physi-

cal form, and Jake, Linda, Toni, Mary, David, Janet, John, Jack, Lulu, Barbara, and my
other friends at Nolo for keeping the ship afloat and on course so that this book
could be published and distributed to the many folks who can really use it.

Table of Contents
1
How to Use This Book
A. Who Should Use This Book 1/2
B. Choosing Which Chapters to Read 1/3
2
How Bankruptcy Works
A. Introduction to Bankruptcy Procedures and Players 2/2
B. What All Bankruptcies Have in Common 2/5
C. What Distinguishes Each Type of Bankruptcy 2/11
3
Finding Out the Debtor Has Gone Bankrupt
A. Notice from the Bankruptcy Court 3/2
B. Informal Notice 3/11
4
The Automatic Stay
A. What the Automatic Stay Stops You From Doing 4/2
B. Exceptions to the Automatic Stay 4/7
C. Results of Violating the Automatic Stay 4/9
D. Asking the Court to Lift the Automatic Stay 4/15
E. When the Automatic Stay Will End 4/28
5
Examining the Bankruptcy Papers
A. Obtaining the Bankruptcy Schedules and Statements 5/2
B. What the Debtor’s Paperwork Should Include 5/3
C. Playing Detective With the Debtor’s Paperwork 5/19

D. Using the Information You Find 5/46
6
The Meeting of Creditors and Other Communication
With the Debtor
A. Permissible Contact Outside the First Creditors’ Meeting 6/2
B. The Meeting of Creditors 6/5
C. Requesting a Meeting to Finish Your Questions (Rule 2004) 6/10
7
Filing and Defending Your Proof of Claim
A. Who Can File a Proof of Claim? 7/3
B. The Benefits of Filing a Proof of Claim 7/3
C. Deadline for Filing a Proof of Claim 7/6
D. If You Miss the Filing Deadline 7/6
E. How to File a Proof of Claim 7/8
F. Where to File the Proof of Claim 7/14
G. How to Defend Your Claim 7/15
H. How to Object to Another Creditor’s Claim 7/18
I. How to Sell Your Claim 7/20
8
Getting Payment for Secured Claims
A. Determining Whether You Have a Valid Lien 8/4
B. Making Sure You’ve Advised the World About Your Lien (“Perfected” It) 8/8
C. What Your Collateral Is Worth 8/10
D.
How Secured Creditors’ Rights Are Affected by the Debtor’s Choice of Chapter
8/12
E. Finding Ways Around the Automatic Stay 8/15
F. How the Debtor May Redeem the Collateral 8/18
G. How the Debtor May Reaffirm the Debt 8/19
H. How Liens Can Be Eliminated During Bankruptcy 8/24

I. Defending Motions to Avoid Your Lien 8/36
J. Combating Serial Bankruptcy Filings 8/38
K. Pursuing Your Rights After the Bankruptcy 8/39
9
Claims That Can’t Be Wiped Out Through Bankruptcy
A. Claims that Survive Bankruptcy If You Prove Certain Facts 9/3
B. Claims That Survive Bankruptcy Automatically 9/18
C. Different Nondischargeability Rules When Debtors File Under Chapter 13
9/22
10
Filing Motions and Complaints in Bankruptcy Court
A. What Could Go Wrong in Handling a Dispute on Your Own 10/3
B. Strict Rules Governing Formatting and Paperwork 10/5
C. Adversary Proceedings 10/5
D. Contested Proceedings 10/11
11
Responding to Motions and Complaints
A. How to Respond to a Motion 11/2
B. Typical Motions and Responses 11/3
C. How to Respond to a Complaint 11/15
D. Typical Complaints and Answers 11/16
12
How To Torpedo an Undeserving Bankruptcy
A. Dismissal Based on Debtor’s Ineligibility 12/4
B. Dismissal Based on Debtor’s Behavior (“For Cause”) 12/6
C. Denial of Discharge 12/12
D. Revocation of an Earlier-Granted Discharge 12/18
13
The Creditor’s Role in a Reorganization Case
A. Overview of Reorganization Case Rules 13/3

B. Chapter 13 Reorganization Plans 13/4
C. Chapter 12 Reorganization Plans 13/34
D. Chapter 11 Reorganization Plans 13/35
14
Conversions Between Bankruptcy Chapters
A. Cases Eligible for Conversion 14/4
B. Conversions from Chapter 7 to a Reorganization Chapter 14/4
C. Conversions from Chapter 11 to Chapter 7 14/7
D. Conversions from Chapters 12 and 13 to Chapter 7 14/8
E. What Happens After a Conversion to Chapter 7 14/16
F. Conversions Between Reorganization Chapters 14/20
15
Prepetition Transfers: How to Keep Payments You’ve Already Received
A. Transfers Subject to Recapture (Avoidance) 15/3
B. Defending Yourself Against Avoidance Actions 15/8
C. Avoidance Actions Against Your Fellow Creditors 15/16
16
Creditors’ Rights After the Bankruptcy Ends
A. The Effect of the Bankruptcy Discharge 16/2
B. Opportunities for Creditors When Not All Claims Were Discharged 16/10
C. Recovering Your Collateral 16/12
D. Collecting Claims from Nonbankrupt Codebtors 16/13
E. Accepting Voluntary Payments from the Debtor 16/15
F. Seeking Criminal Prosecution of the Debtor 16/15
G. Requesting Revocation of the Discharge 16/16
17
Minimizing Future Bankruptcy Losses
A. Diversify Your Customer Base 17/2
B. Get Credit Applications from New Customers 17/2
C. Require a Cosigner or Guarantor 17/4

D. Obtain Collateral 17/4
E. Cash All Checks Promptly 17/5
F. Keep Close Tabs on Customers 17/6
G. Know When to Sue 17/8
18
Forcing Debtors Into Bankruptcy
A. Grounds for Filing an Involuntary Bankruptcy Petition 18/2
B. Who Can File an Involuntary Bankruptcy Petition? 18/3
C. Considering Whether to File an Involuntary Petition 18/4
D. Immediate Effect of Filing an Involuntary Petition 18/6
E. Treatment of Creditors with Postpetition, Predecision Claims 18/7
F. The Court’s Decision 18/8
19
Legal Help Beyond This Book
A. When to Use Bankruptcy Lawyers 19/2
B. Law Libraries 19/6
C. Online Legal Resources 19/11
Appendix
Index
CHAPTER
1
How to Use This Book
A. Who Should Use This Book 1/2
B. Choosing Which Chapters to Read 1/3
1/2 GETTING PAID: HOW TO COLLECT FROM BANKRUPT DEBTORS
P
eople who go bankrupt and can’t
pay their bills are a fact of life for
business owners and others. This
is true in good times and in bad—though

the numbers definitely rise during bad
times. In the early 2000s, for example, with
rising unemployment and stock market
nosedives, record numbers of people filed
for bankruptcy—more than 1.5 million a
year. The number of large companies
seeking bankruptcy protection also
reached record highs. In fact, seven of the
largest companies ever to file for bank-
ruptcy filed their petitions in 2002, and
2003 brought more major filings. Every
person or company that goes bankrupt re-
sults in an even larger number of people
who don’t get paid what they’re owed.
A. Who Should Use This Book
If you’re among the ones left holding the
bag after someone who owes you goes
bankrupt, this book’s for you.
• It’s for the owner of a small business
whose customer has filed for bank-
ruptcy.
• It’s for the spouse going through a di-
vorce from a partner who is threaten-
ing to file for bankruptcy.
• It’s for the employee or retiree from a
company that has gone belly up.
• It’s for the victim of negligence or
wrongdoing who isn’t getting com-
pensated because the perpetrator has
gone bankrupt.

In short, it’s for everybody who is
owed money by a person or business that
has turned to bankruptcy as a solution to
his, her, or its economic difficulties.
What this book doesn’t do is show
you how to file for bankruptcy. There are
plenty of other books on the market for
that. We’ll be looking through the other
side of the bankruptcy lens, so that in-
stead of explaining how to fill out a
bankruptcy petition, we’ll explain what
the petition and other papers filed by the
debtor mean. Instead of telling debtors
how to protect property by claiming it as
exempt, we’ll show you how to check the
legitimacy of the exemptions claimed by
the debtor. And, instead of describing
how to create a reorganization plan, we’ll
tell you how to make sure you get the
most out of the reorganization plan pro-
posed by the debtor.
If you’re looking for a guide to
filing for bankruptcy, see, for ex-
ample:
• How to File for Chapter 7 Bankruptcy, by
Stephen R. Elias, Albin Renauer, Robin
Leonard and Kathleen Michon (Nolo), or
• Chapter 13 Bankruptcy: Repay Your
Debts, by Robin Leonard (Nolo).
Is there anyone who shouldn’t rely on

this book alone, but should also consult
an attorney? Yes. While many of the pro-
cedures for protecting your right to be
paid—like filing a proof of claim or at-
tending a creditors’ meeting—can be done
HOW TO USE THIS BOOK 1/3
without an attorney’s help, others aren’t so
straightforward. For example, asking the
court to refuse to allow a debtor to wipe
out his debt to you, or to force a debtor
into involuntary bankruptcy are best done
with an attorney’s help. Throughout this
book, we’ve done our best to point out
the situations in which you’d benefit from
hiring an attorney. How to find a good
one is discussed in Chapter 19.
B. Choosing Which Chapters
to Read
You may not have to read this entire
book. For example, we’ve written some
material covering situations in which the
debtor is still merely threatening bank-
ruptcy—material that you can skip if your
debtor is already deep in bankruptcy
court proceedings.
You can also narrow down your read-
ing based on the type of claim you hold.
If your claim is secured—that is, the law
or the debtor has given you the ability to
take the debtor’s property if he doesn’t

pay the bill—you’ll be interested in Chap-
ter 8, which explains how to get the
debtor to pay secured claims. If your claim
is not secured, then you’ll want to focus
on the chapters dealing with the rights of
unsecured creditors (Chapters 7 and 9).
The following chapter summary will
help you decide what to read and when
to read it.
Chapter 2: How Bankruptcy Works.
If this is the first time you’ve been in-
volved with a bankruptcy, start here. This
chapter reviews the different types of
bankruptcy relief available, including
Chapters 7, 11, 12, and 13 bankruptcy.
You’ll also find this chapter useful if
you’ve dealt with bankruptcy before but
want to review the differences between
these types of relief.
Chapter 3: Finding Out the Debtor
Has Gone Bankrupt.
Everyone should
read this chapter, though not necessarily
the whole chapter. If you’re concerned
that someone who owes you money
might file for bankruptcy, then read the
sections covering what kind of notifica-
tion to expect and how to respond once
you receive it. This chapter also explains
what happens if the debtor fails to notify

you. If you’ve already received the notice
of bankruptcy, read the sections clarifying
your current rights and responsibilities
and how to train your staff to respond to
future bankruptcy notices.
Chapter 4: The Automatic Stay. This
chapter is a must-read for everyone. The
very moment a debtor files for bank-
ruptcy, something called the automatic
stay goes into effect. Anything you do to
collect your claim after that violates fed-
eral law. Read this chapter so you don’t
waste time and money by improperly
pursuing the debtor.
1/4 GETTING PAID: HOW TO COLLECT FROM BANKRUPT DEBTORS
Chapter 5: Examining the Bank-
ruptcy Papers.
After filing for bank-
ruptcy, debtors must make lengthy and
detailed disclosures to the bankruptcy
court. This chapter takes you through all
the forms and schedules, explains what’s
supposed to be revealed on them and
helps you understand the significance of
each disclosure. You’ll definitely want to
read this chapter if this is the first time
you’ve been involved in a bankruptcy.
And even if you’re an experienced credi-
tor, you may benefit from the checklists
and other analytical advice provided.

Chapter 6: The Meeting of Creditors
and Other Communications With the
Debtor.
The automatic stay creates real
dangers for creditors who need to talk
with debtors. This chapter lays out what
you can and cannot do—what you can
say, when you can say it, and when you’re
better off talking to the debtor’s lawyer.
It’s important information for everyone.
Chapter 7: Filing and Defending
Your Proof of Claim.
This chapter ad-
dresses the crucial question of how to
bring the court’s attention to the amount
that the debtor owes you. In fact, the en-
tire book was written around answering
this question and it’s companion ques-
tion, “How can I collect on my claim
without ending up losing money in attor-
neys, fees or paying court penalties be-
cause I did something incorrectly?”
Chapter 8: Getting Payment for Se-
cured Claims.
You can skip this chapter
if you don’t hold a lien against (or secu-
rity interest in) the debtor’s property. If
you do have a lien, this chapter will ex-
plain whether and how you can preserve
or enforce it during the bankruptcy.

Chapter 9: Claims That Can’t Be
Wiped Out Through Bankruptcy.
This
chapter applies to both secured and unse-
cured creditors. However, it is particularly
important if you’re an unsecured creditor,
because your claim represents your sole
right to payment. (Secured creditors can
pursue their liens in addition to their
claims, provided that their liens survive
the bankruptcy.) The debtor’s goal in fil-
ing for bankruptcy is to “discharge,” that
is, wipe out your claim against him. Your
goal is to see that this doesn’t happen.
Your best way of attaining this goal is to
point to portions of the bankruptcy law
that list types of obligations that indi-
vidual debtors can’t walk away from. In
this chapter you’ll learn what those obli-
gations are, and what you’ll need to show
the bankruptcy court in order for your
claim to be excepted from discharge.
Chapter 10: Filing Motions and
Complaints in Bankruptcy Court.
At
some point in the bankruptcy case, you
may need to ask the bankruptcy judge for
a ruling in order to protect your rights as
a creditor. You might, for example, ask
the court to lift the automatic stay so you

HOW TO USE THIS BOOK 1/5
can foreclose on your collateral, to limit
the debtor’s ability to protect property, to
deny the debtor’s discharge, or any one of
a number of other actions. Read this chap-
ter before you ask the court for help or
hire an attorney to do this work for you.
Chapter 11: Responding to Motions
and Complaints
. Over the course of the
bankruptcy proceedings, the debtor or
the trustee may ask the court to make rul-
ings that affect you or your claim. Read
this chapter if the court notifies you that a
motion or complaint has been filed
against you, to learn how to respond.
Chapter 12: How to Torpedo an
Undeserving Bankruptcy.
Read this
chapter if you think the debtor doesn’t
deserve a bankruptcy discharge. It will
explain when and how the debtor’s bank-
ruptcy can be terminated and the debtor
held to his obligations.
Chapter 13: The Creditor’s Role in a
Reorganization Case.
Read this chapter
if the debtor filed under bankruptcy
Chapter 11, 12, or 13. You’ll learn what
goes into the creation of a reorganization

plan and what you should expect to re-
ceive from it.
This book doesn’t have a sepa-
rate chapter covering the
creditor’s role in a Chapter 7 case.
That’s because Chapter 7 is generi
c bank-
ruptcy. All the general rules and concepts
described in other chapters apply to Chap-
ter 7 cases. However, reorganization bank-
ruptcies present exceptions that require a
separate discussion.
Chapter 14: Conversions Between
Bankruptcy Chapters.
Debtors are not
locked into the type of bankruptcy they
initially filed under. Read this chapter if
your debtor is planning to change chap-
ters—or if you believe the debtor should
be in a different chapter and you would
like to force the issue.
Chapter 15: Prepetition Transfers:
How to Keep Payments You’ve Al-
ready Received.
Read this chapter if the
trustee or the debtor has asked you to
give back money or property you re-
ceived prior to the bankruptcy filing.
You’ll learn the circumstances under
which these requests are proper and your

possible defenses.
Chapter 16: Creditors’ Rights After
the Bankruptcy Ends.
Read this chapter
if the debtor’s case was dismissed or the
debtor was unable to discharge your
claim. You should also read this chapter if
you hold a security interest that the court
didn’t void. You may be able to resume
efforts to collect what’s owed you.
Chapter 17: Minimizing Future
Bankruptcy Losses.
This chapter is pri-
marily for business owners. It contains
suggested practices for getting customers
to pay up well before they go bankrupt.
1/6 GETTING PAID: HOW TO COLLECT FROM BANKRUPT DEBTORS
Chapter 18: Forcing Debtors Into
Bankruptcy.
Would you have a greater
chance of getting paid if the person who
owes you money just went ahead and filed
for bankruptcy? There are rare situations in
which this is true. This chapter explains
when you might want to file an involun-
tary bankruptcy on the debtor’s behalf.
Chapter 19: Legal Help Beyond This
Book.
Read this chapter for information on
doing your own legal research or finding a

good attorney to assist you with issues too
complex to be covered in this book.
Icons Used in This Book
To aid you in using this book, we use
the following icons:
The caution icon warns you of
potential problems.
This icon indicates that the
information is a useful tip.
This icon refers you to helpful
books or other resources.
This icon indicates when you
should consider consulting an
attorney or other expert.
This icon refers you to a further
discussion of the topic some-
where else in this book.
Minding our “he’s” and “she’s.”
It’s almost impossible to write a
book of this nature without using per-
sonal pronouns. In an effort to reach
some measure of gender neutrality, we
have alternated the use of “he” and “she.”
This wasn’t done mathematically, how-
ever, so we apologize in advance for any
imbalances.
Legal Citations Used in This Book
At times, we include references to
the law or case on which we’re bas-
ing a particular discussion point.

However, we use a standard legal
shorthand for these. For example, a
reference to a statute (law) will look
something like this: “11 U.S.C. § 362.”
That means volume 11 of the U.S.
Code (federal law), Section 362. Or,
a reference to a case that a court has
decided may look something like
this: In Re Jamo, 283 F.3d 392 (1
st
Cir.
2002). You can ignore these refer-
ences if you wish—but if you want
to use them to check the original
source, just ask any legal librarian for
help. Also see Chapter 19 for more
on do-it-yourself legal research. ■
CHAPTER
2
How Bankruptcy Works
A. Introduction to Bankruptcy Procedures and Players 2/2
1. How Federal Law Governs Bankruptcies 2/3
2. Who’s Who in a Bankruptcy Case? 2/3
3. The Different Bankruptcy Chapters 2/4
B. What All Bankruptcies Have in Common 2/5
1. How a Bankruptcy Case Begins—the Petition 2/6
2. The Automatic Stay—Bringing Creditors to a Halt 2/6
3. How You’ll Learn About the Bankruptcy 2/6
4. What Property Goes Into the Bankruptcy Estate 2/7
5. What Property the Debtor Can Keep 2/7

6. How Property in the Estate Gets Distributed 2/8
7. How the Case May End 2/9
C. What Distinguishes Each Type of Bankruptcy 2/11
1. Chapter 7 Bankruptcy 2/11
2. Chapter 13 Bankruptcy 2/13
3. Chapter 11 Bankruptcy 2/18
4. Chapter 12 Bankruptcy 2/22
2/2 GETTING PAID: HOW TO COLLECT FROM BANKRUPT DEBTORS
B
efore we explain what you can
and can’t do to collect your
money, you should know some-
thing about what bankruptcy is and how
it works. This chapter will stick to the ba-
sics—the need-to-know stuff—so that you
can get on with the task at hand. We’ll
cover:
• the basic procedures and players in a
bankruptcy (Section A)
• some key features common to all
bankruptcies (Section B), and
• the particular features of each type of
bankruptcy (Section C).
A. Introduction to Bankruptcy
Procedures and Players
Bankruptcy exists to help debtors (the
people who owe money) while simulta-
neously protecting their creditors (the
people to whom the money is owed).
Bankruptcy helps debtors by allowing

them to avoid paying some or all of their
bills or debts. In technical terms, the law
allows them to “discharge” their legal ob-
ligation to pay. Bankruptcy protects credi-
tors by setting limits on the types of debts
that can be discharged and by making
sure all creditors are treated fairly.
As a creditor, you’ll refer to the money
that the debtor owes you as your “claim.”
Much of this book is dedicated to show-
ing you how to protect that claim. The
best type of claim to have is a “secured”
one. A claim is secured when you hold a
“lien” against the debtor’s property for the
amount of the claim. A lien enables you
to take and sell the debtor’s property
(“collateral”) if the debtor doesn’t pay the
debt. Liens may be created by contract
(for example, a home mortgage or a car
loan), by law (for example, a mechanic’s
lien for work done to improve real estate)
or by court order (for example, a judg-
ment lien created to secure the payment
of a property distribution in a divorce). If
you are owed more than the debtor’s col-
lateral is worth, then you have a secured
claim to the extent of the collateral’s value
and an unsecured claim for the balance.
If none of the possibilities just de-
scribed gives you the right to collect from

the debtor’s property, then your claim is
unsecured. Cash loans and unpaid bills
for services are usually unsecured claims.
They can still be collected on in a bank-
ruptcy, but unsecured claims are usually
the last to get paid.
The bankruptcy laws try to balance
the debtor’s need for an economic fresh
start against the creditor’s contractual
right to be paid. Whether the law
achieves this balance depends on your
perspective. Debtors tend to see the law
as favoring creditors, while creditors usu-
ally see the law as favoring debtors. Over
the years, the law has been changed sev-
eral times to make it more favorable to
creditors, so perhaps it truly did start out
tilted in the debtor’s favor.
HOW BANKRUPTCY WORKS 2/3
No matter who ultimately gets the fair-
est treatment, however, you’ll notice that
all bankruptcy cases revolve around the
debtor. That’s not too surprising, since it’s
usually the debtor who starts the case,
and it’s the debtor’s financial condition
that is the focus of the legal proceedings.
In consumer cases where the debtor is
not represented by an attorney, the judge
may have to spend a significant amount
of extra time with the debtor. Try to real-

ize that this attention to the debtor does
not necessarily represent a bias against
your interests
1. How Federal Law Governs
Bankruptcies
Bankruptcies are governed by federal law,
namely the U.S. Bankruptcy Code. If you
want to look up the law, go to Title 11 of
the U.S. Code. (See Chapter 19 of this
book for more on doing your own legal
research.) Title 11 is divided into chapters,
some of whose numbers you may recog-
nize, because they correspond to different
types of bankruptcy: Chapter 7, Chapter
11, Chapter 12, and Chapter 13.
If you end up going to court over a
bankruptcy case, it won’t be in the usual
state or federal court system. Bankruptcy
cases are filed in special bankruptcy
courts that don’t hear any other kind of
case. Their rulings govern all actions filed
against the debtor in other courts any-
where in the country. So, if you have a
claim against the debtor, you must present
it in the bankruptcy court or risk losing it.
In fact, the mere filing of a bankruptcy
petition is enough to bring all litigation
against the debtor (the person who filed
the bankruptcy petition) to a halt. This is
true no matter what part of the United

States the other litigation is filed in, or in
what type of court. This is known as the
“automatic stay.” It’s so important we’ve
devoted all of Chapter 4 to it.
2. Who’s Who in a Bankruptcy
Case?
Let’s look at who the major players are in
a bankruptcy proceeding, including the
debtor, creditor, trustee, and bankruptcy
court judge.
a. Debtor
The person or company who files for
bankruptcy is called the “debtor.”
b. Creditor
You—a person or business owner owed
money by the debtor—are referred to as
a “creditor.” Creditors are separated into
two categories, those holding secured
claims and those holding unsecured
claims.
2/4 GETTING PAID: HOW TO COLLECT FROM BANKRUPT DEBTORS
c. Trustee
After someone files for bankruptcy, the
federal bankruptcy court will appoint a
“trustee” to directly oversee the handling
of the bankruptcy case. In Chapter 7
cases, the trustee for a particular case is
selected from a panel of trustees. In
Chapters 12 and 13 cases, one trustee
handles all cases filed in that trustee’s

jurisdiction. (A jurisdiction is all or a por-
tion of a federal court district.) In Chapter
11 cases, the court doesn’t appoint a
trustee at all, unless it finds that special
circumstances warrant it.
You may also hear the term “U.S.
trustee.” This is a federal agent who
keeps tabs on all bankruptcies. The Ex-
ecutive Office for U.S. Trustees is a divi-
sion of the U.S. Attorney’s office, which is
part of the Department of Justice. One
U.S. trustee oversees several bankruptcy
courts. Individual cases within those
courts are assigned to assistant U.S. trust-
ees, who also employ attorneys, auditors
and investigators. U.S. trustees work
closely with their Department of Justice
colleagues from the FBI and other federal
agencies to ferret out fraud and abuse in
the bankruptcy system.
The most likely setting in which you,
as a creditor, might encounter a U.S.
trustee is in a Chapter 11 case, where they
take center stage because they oversee the
administration of these cases (unless a
separate trustee is appointed). U.S. trust-
ees are also visible in cases that involve
allegations of bad faith or fraud. U.S. trust-
ees work behind the scenes in consumer
cases, where their primary role is as the

supervisor of the panel and the standing
trustees who administer the cases.
d. Bankruptcy Court Judge
The bankruptcy judge has ultimate con-
trol over the debtor’s case. In routine
cases, the judge’s role can be almost cleri-
cal, simply signing standard orders after
little or no review. But don’t let this lack
of involvement fool you. The bankruptcy
judge is in every way a federal judge. He
or she knows the subject matter inside
and out, has the power to punish abusive
behavior, and can take action that perma-
nently affects your ability to collect on
your claim or to sell the collateral.
3. The Different Bankruptcy
Chapters
Not all bankruptcies are the same. In fact,
debtors may choose from four different
types of bankruptcy protection. Each one
is named for the chapter of the Bank-
ruptcy Code where it is found. These in-
clude Chapter 7, Chapter 9, Chapter 11,
Chapter 12, and Chapter 13. The number-
ing scheme may strike you as odd—Con-
gress skipped chapters so that there
would be room to add more of them later.
HOW BANKRUPTCY WORKS 2/5
Chapter 9 Bankruptcy for Cities
Chapter 9 of the Bankruptcy Code

allows municipalities to file for bank-
ruptcy. However, we won’t discuss
Chapter 9 in this book because it
probably won’t be useful to our
readers. Should a city or town that
owes you money file for bankruptcy,
however—as happened to many
creditors in 1994 when Orange
County, California, filed for bank-
ruptcy—the basic rules we discuss
elsewhere in this book will apply.
From your perspective, one of the ma-
jor features distinguishing the different
types of bankruptcy is whether the
debtor’s property can be sold so that
creditors can collect on the proceeds, or
whether creditors must instead rely pri-
marily on the debtor’s future income.
Chapter 7 is the only chapter that al-
lows the debtor’s property to be sold in
order to pay off creditors’ claims. How-
ever, don’t count on selling the property
of an individual—as opposed to a busi-
ness—Chapter 7 debtor. The Bankruptcy
Code allows individual debtors to exempt
certain property, such as a home or car,
from sale. Furthermore, the trustee won’t
sell loan collateral property unless it’s
worth more than is owed on the debt. So,
the only property the trustee can realisti-

cally sell is stuff the debtor can’t claim as
exempt and that isn’t pledged against a
loan. The typical debtor doesn’t have
much property that fits into this category,
and what they do have is seldom worth
selling.
The other three chapters (11, 12, and
13) allow debtors to hang onto their
property while reorganizing their debts.
The focus of the case is the debtor’s avail-
able income, which the debtor must use
to fund a repayment plan. The debtor
drafts the plan and submits it to the court
for approval. Creditors and the trustee
have a chance to object to the plan’s pro-
visions. Once the court finds the debtor’s
plan to be acceptable, it confirms the
plan and the creditors should begin re-
ceiving payments from the debtor consis-
tent with the plan’s terms.
B. What All Bankruptcies
Have in Common
Before detailing the differences between
the four main chapters of bankruptcy,
let’s look at what features they have in
common. This section will cover:
• the petition that starts off the case
(Section 1)
• the automatic stay (Section 2)
• how creditors normally learn about

the bankruptcy (Section 3)
• what property will be subject to the
bankruptcy (Section 4)
2/6 GETTING PAID: HOW TO COLLECT FROM BANKRUPT DEBTORS
• what property the debtor can keep
(Section 5)
• how the property will be distributed
to creditors (Section 6), and
• how the case will probably end (Sec-
tion 7).
1. How a Bankruptcy Case
Begins—the Petition
Regardless of which bankruptcy chapter
the debtor will use, every voluntary bank-
ruptcy case begins the same way, with
the debtor filing a bankruptcy petition.
The petition gives basic information
about the debtor and the type of bank-
ruptcy relief the debtor hopes to obtain.
Along with the petition, the debtor must
give the court a list of creditors, a sched-
ule of assets and liabilities, and a sum-
mary of financial affairs (the debtor’s eco-
nomic transactions for the last several
years before the filing). (See Chapter 5 for
more information on the bankruptcy peti-
tion and related documents.)
2. The Automatic Stay—Bringing
Creditors to a Halt
Debtors receive protection from their

creditors as soon as they file for bank-
ruptcy. This protection is known as the
“automatic stay.” It mandates that all
creditors immediately stop all their collec-
tion efforts against the debtor. The auto-
matic stay goes into effect upon the filing
of the bankruptcy petition (regardless of
whether all the accompanying paperwork
is complete). The stay remains in effect
until the case is closed, the bankruptcy is
dismissed or the debtor receives or is de-
nied a discharge. (See Chapter 4 for a full
discussion of the automatic stay.)
3. How You’ll Learn About the
Bankruptcy
As a creditor, you are most likely to learn
of the debtor’s bankruptcy filing from a
notice sent to you by the bankruptcy
court. The notice will tell you the debtor’s
name, address, and the last four digits of
his Social Security number. It will also
give you the names of the debtor’s attor-
ney (if any) and the trustee—the person
responsible for gathering the debtor’s as-
sets. You will be given a date and place
when the debtor will be available for
questioning by creditors and the trustee.
The notice will also state a deadline by
which you must take any action to pre-
serve your claim or challenge the debtor’s

discharge. (See Chapter 3 for details on
the bankruptcy notice.)
The notice isn’t, however, the only
way you might hear about the bankruptcy
filing. If you have been actively trying to
collect on your claim, you may be told
about the bankruptcy even before you re-
ceive the official notice. If this happens,