In one of our previous articles we discussed bankruptcy as a possible way for a person to get out of debt and have a fresh start. But what if you find yourself on the other side where somebody who owes you money has filed for bankruptcy? Today we are going to discuss the rights and recommended strategies for creditors in bankruptcy. As we are entering a global recession which promises to be deeper and longer than anything we have seen before, bankruptcies will become increasingly common and we need to be prepared.

Many people who receive a notice informing them that their debtor has filed for bankruptcy immediately assume that their money is gone and don’t do anything. But this is not necessarily the case. As a creditor, you have the right for your share of the assets distributed from your debtor’s estate. The problem is that in many cases the value of the assets after everything has been done will not be sufficient to satisfy all claims. In this case, the assets will first be distributed to the creditors with higher priority claims rather than being simply divided between all creditors in proportion to the size of their claims.

If your loan is secured, it will not even be affected by bankruptcy. This means that if you own secured corporate bonds, you will get your money back before anybody else has access to the assets of the insolvent company up to the value of those assets. Staying with the bond example, you can own either senior or subordinated debt. Senior debt claims will be satisfied first, but only after all secured debt claims are paid.

One thing you are required to do once you receive a notice that your debtor has filed for bankruptcy is to stop any collection actions, including even simple phone calls to the debtor. From now on, you will be dealing with the trustee in bankruptcy. As a creditor, you have the right to approve the trustee nomination in a creditor meeting.

You may not get everything you are owed back, but there is a good chance you can keep at least some. If this happens to you, make sure you find out who the trustee is and stay in touch with them. Although not required, hiring a lawyer in this situation is a good idea.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.