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A Few Things You Should Do Before You Consider Bankruptcy

A Few Things Creditors Should Know Before a Debtor Files for Bankruptcy

For over 25 years, I worked as a debtor’s attorney, filing over 4,000 consumer bankruptcies under Chapters 7 and 13. I guided individuals through financial struggles, helping them eliminate or restructure debt. However, my focus has now shifted—I now represent creditors seeking to recover what they are owed from Texas debtors.

With rising financial instability, more individuals are turning to bankruptcy for relief. But before a debtor files, there are key financial steps they should take. Understanding these steps is critical for creditors, as they provide opportunities to recover outstanding debts before bankruptcy protections take effect.

Here are some pre-bankruptcy warning signs and what creditors can do to protect their interests before a debtor files.

Step #1: Monitor the Debtor’s Financial Behavior

Before filing for bankruptcy, debtors often attempt to manage their finances by:

  • Creating a household budget to assess their financial situation.
  • Reducing discretionary spending to avoid default.
  • Prioritizing essential payments, such as rent, utilities, and secured debts (like car loans).

Why This Matters for Creditors:

  • If a debtor suddenly stops making payments, it’s a sign that bankruptcy may be imminent.
  • Creditors should stay in close contact with debtors showing financial distress to negotiate payment plans before bankruptcy is filed.
  • Pre-bankruptcy settlements may allow creditors to recover more than they would in a court-ordered discharge.

Step #2: Look for Debt Management or Consolidation Attempts

Before filing for bankruptcy, many debtors explore debt management solutions, such as:

  • Debt consolidation loans – Combining multiple debts into a single loan with lower interest rates.
  • Negotiating lower interest rates with creditors.
  • Enrolling in debt settlement programs to pay off obligations for less than the full amount owed.

Why This Matters for Creditors:

  • If a debtor is in a debt management program, creditors should monitor payments carefully to ensure compliance.
  • Debt settlements can reduce creditor losses—it may be better to accept partial repayment than risk full discharge in bankruptcy.
  • Delinquent debts are harder to collect if a debtor enters a structured repayment program or bankruptcy.

Step #3: Recognizing When a Debtor is Preparing to File for Bankruptcy

When financial hardship is too severe, a debtor may begin taking steps toward bankruptcy, such as:

  • Consulting a bankruptcy attorney.
  • Gathering financial records to prove insolvency.
  • Listing income, assets, and debts to determine bankruptcy eligibility.

Why This Matters for Creditors:

  • If a debtor is actively consulting bankruptcy attorneys, creditors should act quickly to pursue collection efforts before a bankruptcy petition is filed.
  • Once a bankruptcy case is filed, creditors are prohibited from taking collection actions due to the automatic stay.
  • Filing a lawsuit or obtaining a lien before bankruptcy can provide a stronger legal standing in debt recovery efforts.

How Creditors Can Protect Themselves from Bankruptcy Losses

If you suspect that a debtor is on the verge of bankruptcy, consider the following strategic actions:

  1. Secure Outstanding Debts – If possible, convert unsecured debts into secured debts by obtaining liens or collateral agreements.
  2. Negotiate Partial Payments – Offering structured settlements may prevent a debtor from filing bankruptcy altogether.
  3. File Legal Claims Quickly – Once bankruptcy is filed, debt collection is restricted, making pre-bankruptcy legal action critical.
  4. Monitor Bankruptcy Filings – Stay informed about debtor bankruptcy petitions to respond within legal deadlines.

Final Thoughts: Protecting Creditor Rights in Bankruptcy Cases

While bankruptcy can provide relief to debtors, it also poses significant financial risks to creditors. By recognizing early warning signs and taking proactive legal action, creditors can maximize debt recovery efforts before bankruptcy protections take effect.

If you are a creditor seeking to recover debts from a Texas debtor on the brink of bankruptcy, expert legal guidance is essential.

For more information on creditor rights and debt recovery strategies, visit our website or call (713) 974-1151 to schedule a consultation.

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Michael Busby is a Houston divorce lawyer who has been in practice for over 20 years and appears daily in the Family Law Courts of Harris County and Fort Bend County Texas

Busby & Associates , have two Houston Offices, one in Chinatown, Houston Texas and another in Independent Heights, Houston, Texas. Michael Busby is Board Certified in Family law by the Texas Board of Legal Specialization.