Most Debt Goes Away In Bankruptcy
By Justin Harelik • Bankrate.com
Q: Dear Bankruptcy Advisor:
We received a verdict in our favor in small claims court. The next day, our debtor filed for Chapter 7 bankruptcy. Is there any way we can collect what is owed us?
A: Dear Judy,
Every case is different, so I cannot say whether you can collect on your judgment. In the majority of cases, you will not. However, since I don’t know the type of judgment you received, I will explain your options in the event you can collect on this debt.
As a general rule, most small claims court judgments can be discharged in bankruptcy. That means that the debt, or liability for the debt, can be eliminated when a person files for bankruptcy. You will receive a notification in the mail, notifying you of the bankruptcy filing. The person who files for bankruptcy is called the debtor. If the debtor has any assets that are going to be seized as a result of the bankruptcy filing, then you could be paid some or all of the money you are owed.
The debtor owes you money, so you are one of his creditors, like those who hold outstanding debt, such as credit card companies, lenders of payday or personal loans, or a doctor still owed for an office visit. Once you receive notification, you will be able to file a “proof of claim.” This is an official notification to the court and to the person assigned to the debtor’s case, called the trustee, that the debtor owes you money. This definitely does not require attorney assistance. You can easily file the one- or two-page document with the court and send it to the appropriate parties. If money is distributed in this case, then you can receive it but only if you file the proof of claim.
There are exceptions that could make your debt nondischargeable, meaning it cannot be eliminated in the bankruptcy. For example, if the debtor committed fraud or the judgment was from an accident in which he or she was under the influence of alcohol, then you might be able to challenge the debt as nondischargeable. That means that you can make a claim that he cannot eliminate this debt in bankruptcy. Therefore, even though he listed it in the bankruptcy, you will be able to collect the debt after his bankruptcy is completed.
Claiming the debt is nondischargeable will require that you file the equivalent of a lawsuit inside the bankruptcy. It is called an “adversary action.” While you can do this on your own, you will need to be very careful to fill out the proper paperwork and meet all deadlines. The judge does not care whether you have bankruptcy experience, only that the adversary process is followed properly.
Also, you might want to review the petition and make sure that the debtor listed all of his or her assets. It is possible that you could get this guy into trouble if he failed to list all his assets. This could be a way for you to be paid because you could notify the trustee in the case that he potentially is hiding assets. You may be able to have the bankruptcy court in your area print out the petition for you to review for a small fee.
You have a couple of options, but you might find that in the end that this case is a “no asset” case. That means there will be no money distributed to creditors. Therefore, all creditors, including you, will receive nothing. However, it is worth the effort to first determine whether any of the above options exist for you to explore.
Read more Bankruptcy Adviser columns and more stories about debt management.
Justin Harelik writes The Bankruptcy Adviser for Bankrate.com. He is an attorney with Price Law Group in Los Angeles. o ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.