Confronting debtors in a bankruptcy proceeding can be a draining exercise for creditors, who often wait months -- or years -- to collect a fraction of the amount owed. However, creditors can pursue different strategies to speed up the process. Creditors can try negotiating a settlement or join multiple parties to pressure a recalcitrant debtor. In extreme situations, creditors can ask for an administrative hold on the amount or challenge the bankruptcy petition itself.
Forming Creditor Alliances
The presence of multiple players sometimes provides an opportunity to form alliances around common interests, according to an analysis posted by First American. For example, a second mortgage lender might enlist a first mortgage lender to pursue claims against a debtor. Also, when multiple parties and their lawyers get involved in a bankruptcy claim, their presence is likelier to result in a settlement that favors a creditor's interests.
Negotiating With Debtors
Instead of imposing their will, creditors may be better off allowing the debtor some breathing space to recover. Financial setbacks happen for many reasons, such as illness or loss of a job. A creditor who appears willing to compromise stands a better chance of recovering at least part of the money. Trying to squeeze debtors can drive them to file for bankruptcy, which is generally not in a creditor's best interests.
Revocation of Discharge
Debtors can be held liable for misstatements made under the U.S. Bankruptcy Code, such as failing to disclose relevant financial information. Creditors suspecting fraud can challenge a debtor's attempt for Chapter 7 bankruptcy relief. If the debts have already been discharged, the creditor can petition for the order to be revoked. Creditors must file the request within a year after the discharge is granted, or, in some instances, before the case closes.
Right of Setoff
A 1995 U.S. Supreme Court ruling allows creditors to pursue mutual obligations. Creditors can ask the court to place an administrative hold on the money until the court resolves the issue, says bankruptcy attorney Kurt M. Carlson. This process is known as the right of setoff. A group of creditors successfully used this procedure during the 2002 Kmart bankruptcy case to claim $20 million in various accounts that were being held for the troubled retailer.
Settlement Versus Litigation
In some instances, offering to settle the claim is more productive than running up collection and legal fees. As a rule of thumb, early resolution through arbitration or mediation is the least expensive route, according to an analysis from Turnaround Management Corp. Litigation costs are tied to the time spent pursuing a claim, so creditors need to study when it makes more sense to negotiate a settlement or take their chances in court.
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