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What to do when your debtor files for bankruptcy

If you are owed payment by a client, it is likely that your cash flow has suffered as a result of this. Depending on the amount owed, this could be a very stressful situation, and it can be made even worse if you learn that the debtor has filed for bankruptcy.

It is likely that you are familiar with the general way in which bankruptcy works. When a debtor successfully files for bankruptcy, it means that they are entitled to an automatic stay in the majority of circumstances. This automatic stay is temporary, but it means that creditors cannot take any action to attempt to retrieve the debt.

What will my debtor's bankruptcy mean for me?

The effect that the bankruptcy will have on you as a creditor largely depends on the chapter of bankruptcy that the debtor filed for. If like in most cases, the debtor filed for Chapter 7 bankruptcy, it is likely that the majority of the debts will be discharged. If Chapter 11 or Chapter 13 is filed for, debtors simply reorganize their debts so that they can be paid over time.

Should I take action to retrieve the debt?

Unfortunately, creditors sometimes have to simply accept the unpaid debt if bankruptcy is filed. It is a good idea, however, to do a cost-benefit analysis to decide whether you should take action to retrieve the debt.

It is important that you understand your rights as a creditor and that you take action to retrieve the debts owed when it is appropriate. Additionally, there are many things you can do to avoid missed payments going forward.

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