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Creditor rights in a bankruptcy

When you discover that someone who holds a loan or a line of credit with your company is declaring bankruptcy, your first concern may be what will happen to the debt. In the case of a mortgage, for example, it could be that the borrower intends to reaffirm the mortgage or voluntarily continue to make payments.

On the other hand, he or she could be planning to discharge the debt in the bankruptcy. If you find that you are on the list of creditors who should receive some amount of what is due to you after the liquidation of the debtor's assets, your new concern may be where you are in the order of payment. 

Your right to payment

Achieving your correct place on the list may not be as fair as it should be. Some creditors engage in unlawful or unethical practices against the debtor or against the other creditors and lenders on the list. If one of these is the case, the court may subordinate that lender

There are many reasons that a judge might rearrange the order of creditors on the list. If the court determined that one of these applied, even a company with a valid claim may be moved down the list. Reasons for subordination may include creditor misconduct, such as misrepresentation, fraud or breach of duty, that results in damage to either the party declaring bankruptcy or to you or other creditors involved in the case. In some circumstances, courts have ruled to subordinate a creditor only to the point necessary to correct the damage.

Your right to take action

You may have taken actions against the borrower when he or she began to fall behind in payments on your loan. As long as you have exercised your rights to collect the debt within the agreement that the borrower signed, the court should not subordinate you or otherwise penalize your actions. 

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