The numerous economic challenges facing the lending industry from post-pandemic, high rates, and low housing sales are placing a substantial financial burden on borrowers and, as such, might lead to many bankruptcy filings in the coming days. Successfully overseeing a client’s bankruptcy can be daunting and complex for a lender. Thus, having a better understanding of your rights and possible resolutions in such scenarios can prove helpful in navigating these cases and reducing losses. Depending on the type of bankruptcy filings made by the client, your recovery options are stated according to the law. For business entities, filings are made under Chapters 5,7, or 11 of the Bankruptcy Code, while Individual borrowers file for bankruptcy under Chapters 7 or 13. It is essential for you as a lender to know the type of bankruptcy filed by a customer since this determines your available rights and recoveries. Here are some of the available recovery approaches.

  • Proof of Claim and Preference Actions: By completing a standard bankruptcy document showing the pending balance owed by the borrower at the time of filing, the lender can submit a proof of claim. However, in some cases, borrowers can recoup payments made immediately before filing under section 547 of the Bankruptcy code.
  • Imposing an Automatic stay: At the point of filing for bankruptcy, the associated lender is immediately prohibited from attempting to recover the outstanding debt total or take back the collateral. Although there are limited exceptions to this, it is best to have necessary consultations to avoid unnecessary sanctions.

Others include business dealing with customers, the right to reclaim, and critical vendor designation. It is important that lenders work with bankruptcy attorneys to understand their rights better when a customer files for bankruptcy. To read more, click here.

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