How do Bankruptcy Procedures Affect the Creditors?

How do Bankruptcy Procedures Affect the Creditors?

Some creditors believe that resorting to bankruptcy procedures provides a solution to their outstanding problems with their debtors. Others believe that bankruptcy procedures won't only reflect negatively on the debtor, but also on them. As a result they prefer using it as a means of pressure on the debtor to find solutions.

BANKRUPTCY IMPLICATIONS THAT AFFECT THE CREDITOR

What are really the most important effects of bankruptcy procedures? Specifically, how do they affect creditors, even more specifically the unsecured ones? Understanding this will help you decide as a creditor whether declaring the debtor's bankruptcy will be in your interest, or if you should prefer another method. Here is a list of 6 effects of a declared bankruptcy:

1. ALL CLAIMS, CAUSES AND INDIVIDUAL ACTIONS ARE CEASED
   As soon as the bankruptcy is declared, all individual actions against the bankrupt debtor cease, and the relationship becomes directly with the trustee who manages matters in a way that she/he sees appropriate. So after the debtor has been declared bankrupt, it is no longer possible for a creditor to continue her/his claim to collect her/his debt separately.
2. THE INTEREST ON DEBT IS STOPPED
   Do not be deceived if your debt includes interests that they make your debt mass larger and, accordingly, your percentage of the bankrupt's funds is greater. The declaration of the debtor's bankruptcy entails the cessation of the validity of all the interest on the bankrupt's debts, whether these interests are consensual or legal. So you as a creditor are only entitled to claim the principal of your debt and the interest that were due before the date of the bankruptcy declaration. This is so that the creditors whom debts are with interest, do not benefit over others.
3. COMPETE WITH SECURED CREDITORS
   In the existing business conditions, no commercial business can start or develop without external financing from a bank or other financial company. These financial companies usually burdens business assets with mortgages so that they can regain their rights without competition from anyone. Therefore, declaring the debtor's bankruptcy will make the secured debts depreciate most of the assets, and the unsecured creditors will only have the remaining section which they have to distribute according to the percentage of each debt of the remaining total.
4. DEBT DEADLINES ARE CANCELED
   If you believe that filing your application for a debtor's bankruptcy would give you an advantage over the other creditors, you are wrong. And if you think that debt fulfillment will be arranged according to the due date or according to the date on which the obligation arose then you are also mistaken. As soon as the court declares the debtor's bankruptcy, all the debts deadlines will be dropped, and all of them will become directly due for payment regardless of the date they are arranged or the date they are due.
5. AN UNSECURED CREDITORS GROUP IS COMPOSED
   In activation of the principle of equality between creditors, a group of unsecured creditors represented by a trustee is formed by law. This group includes all unsecured creditors, regardless of the source of the debt, whether it arose from a contract or a harmful act. As for any secured creditor, she/he obtains her/his rights from selling the mortgaged assets for her/his benefit. But if the funds of the sold asset are not sufficient to return the entire debt to her/him, she/he also enters into the unsecured creditors group as an unsecured creditor to share with others.
6. OWNERS' AND DIRECTORS' RESPONSIBILITY
   If you are a creditor for a company and the trustee has been able to prove that the bankruptcy was caused by the owners or managers by committing a serious mistake or negligence or they were involved in a risky speculative deal that caused the company to lose money, these can be personally responsible for such debts if the debtor's assets are insufficient to return the rights of all creditors back.

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References:
Essam Al Tamimi (2020), Ten Reasons why you should not consider filing for Bankruptcy, Al Tamimi & Company.
Experian, Bankruptcy: How it Works, Types & Consequences.