Someone owes you money. After months of haggling and waiting for them to pay up, you hear that they’ve filed bankruptcy. Chapter 7. How are you going to get paid now?
Answer: You probably won’t.
Yeah, I know that isn’t what you wanted to hear, but that’s the truth. The vast majority of bankruptcy cases involve little to no distribution to unsecured creditors. “Unsecured” means that the debt isn’t secured by any collateral. In other words, there isn’t a particular piece of property that you can take if they don’t pay you. There’s just a regular old unpaid debt. Secured creditors get treated differently depending on what happens to their collateral, but unsecured, non priority creditors don’t have much recourse when a debtor has filed bankruptcy.
“But that’s not fair!” you say, “This is a legitimate debt!”
Yes, and so are all the other debts that are drowning the debtor. The purpose of bankruptcy isn’t to make sure that you get paid. It’s to recognize that you can’t get blood from a turnip, and rather than require the debtor to spend his entire remaining life trying to pay you (and everyone else) back, we let the debtor use this legal process to get a fresh start.
To prevent debtors from abusing the system, it has a lot of limits. If the debtor has lots of property, he’ll lose it in order to get you paid. If the debtor has too much income, he’ll be forced to file Chapter 13 instead of Chapter 7 in order to get you paid. If the debtor is hiding assets or lies to the bankruptcy court, he can be prosecuted and thrown in jail. If he had assets but tried to get rid of them before he filed bankruptcy, those assets can be yanked back and sold to get you paid. And once he’s filed, he can’t file Chapter 7 again for another 8 years.
So if you have a friend, customer, or business associate that owes you money, you may want to consider working out a compromise settlement. Because if he qualifies for Chapter 7, he may just leave you with nothing.
Finally, note that every bankruptcy case and every debtor is different. There are a lot of factors that go into whether someone will file bankruptcy, what chapter they’ll file under, and how they’ll treat their creditors once they’re in bankruptcy. The first thing you need to do if someone who owes you files bankruptcy is talk to a knowledgeable bankruptcy lawyer who can advise you as to your rights.