So what happens in this instance? You need to know what your rights are.
There are three chapters of bankruptcy that are commonly filed in the State of New Jersey, and each one has an impact on a creditor.
Chapter 7: If the debtor has filed under this Chapter, you stand a good chance at having your debt discharged, which means that you will never be able to collect on it from that particular debtor. Note that if there are more than one debtor, you may seek to collect from the non-bankrupt debtor. Depending on the nature of the debt, you may also seek relief from the automatic stay so that you can collect on that debt, although, for most unsecured creditors, this is not an option. In most Chapter 7 filings, the debtor (or debtors) has no assets that can be liquidated, so you will likely receive nothing.
This changes, however, when the Chapter 7 Trustee issues a Notice of Assets, which means that, in his or her determination, there are assets in the bankruptcy estate that can be distributed to creditors. What you need to do in that instance is to file a Proof of Claim as soon as possible, to ensure that your claim is considered in the ultimate disposition of the estate. A Proof of Claim is a document that outlines how the debt was incurred and how much the debtor owes you. Be mindful that secured creditors will receive distribution before unsecured creditors, so it is important to file your Proof of Claim as soon as possible upon learning of possible assets (or have your attorney do it for you).
Chapter 11: This, like Chapter 13 (which I will get into below), is a chapter of reorganization as opposed to one of liquidation. This means that the debtor will be disbursing funds to its creditors monthly as part of the Chapter 11 Plan. Like a Chapter 7 with assets, you will need to file your Proof of Claim as soon as possible upon learning of the bankruptcy filing. It may take many months for a plan to be proposed, and it would be beneficial to retain counsel for a Chapter 11, as this particular brand of bankruptcy can be complicated quickly. In the Chapter 11 Plan, the debtor will specify in detail how it proposes to repay the debt owed to you or your business. You will have an opportunity to review the Plan and raise any objections prior to confirmation.
Chapter 13: This is a reorganization chapter for individual debtors. Similar to Chapter 11, a plan is proposed, although at the outset of the case as opposed to months down the line. Additionally, a Chapter 13 Plan may not specify the exact amount you are to receive each month. Many plans provide for a pro rata distribution to unsecured creditors. This means that all creditors who file a claim in the matter will receive an amount proportional to the percentage their claim represents with respect to all claims that have been filed. For example, if the debtor pays $500 a month, and your claim is in an amount equal to 1/5th of all the claims that have been filed, you will receive $100 a month for the life of the plan, usually three to five years.
However, there are other avenues by which a creditor may assert his rights while the debtor is bankrupt. Certain creditors may filed for relief from the automatic stay, where they request leave from the court to continue with the debt collection process. I have seen this mostly with real estate mortgages, car loans, and on occasion tenancies, where the debtor has not been making payments, and continued non-payment would harm the creditor.
Another tool, less frequently used, is that of a complaint objecting to discharge. Be aware that there are very narrow grounds by which you can object to discharge of your debt. The most common of these is a debt incurred by fraudulent means. If you are successful, the debt will remain on the books until you are able to collect it in full.
Make no mistake, bankruptcy can be as complicated for a creditor as it is for debtors. It is to your advantage to consult with an experienced bankruptcy attorney, who has worked not only with creditors but also with debtors. If you are able to receive a distribution, you do not want to be forever barred from collecting through the bankruptcy court.