Can You Collect a Judgment After the Company Files for Bankruptcy?

When you win a lawsuit and receive a judgment in your favor, you become an "unsecured" creditor of the losing party. Although you're entitled to receive the funds or property outlined in the terms of the judgment, the resulting debt is subordinated to certain other forms of debt. These types of debt, known broadly as "secured" or "senior" debts, may included real estate or vehicle loans and lines of credit tied to physical pieces of property or equipment. On the other hand, your "junior" debt is backed by nothing more than the terms of the judgment against your debtor.

The U.S. Bankruptcy Code dictates that a bankrupt business must satisfy its secured creditors before settling any of its unsecured debts. This is true regardless of whether the business files under Chapter 7 or Chapter 11 of the Bankruptcy Code. In the former case, the judge overseeing the bankruptcy will divide up the business's cash and assets among its secured creditors.

If there is anything of value left over after all of the secured creditors have been compensated in full, the business's unsecured creditors may receive a proportional slice of these remaining assets. Once all of the business's assets have been distributed among its various creditors, it will cease to exist.

If the business files for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the presiding judge will broker a "reorganization" plan that discharges many of the business's unsecured debts. With most of its unsecured creditors out of the way, the business may be able to remain current on its secured-debt payments.

In either case, you're unlikely to receive compensation once the debt has been discharged. In fact, you probably won't even remain on record as a creditor to the business once the bankruptcy process has terminated. If the business filed a Chapter 7 bankruptcy, you have virtually no chance of collecting on your debt as an unsecured creditor.

However, you may be able to become a secured creditor. Before the business files for bankruptcy, you'll need to file an "abstract of judgment" form in each of the jurisdictions in which it owns real property. Depending upon the laws in your state, this form may entitle you to a portion of the business's property in the event that it files for bankruptcy. Once you've filed the abstract, you'll need to attend the post-bankruptcy "meeting of creditors" to stake your claim.

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