How are creditors compensated in bankruptcy cases?

Creditors in bankruptcy cases in California are generally compensated by an automatic stay, which stops the collection of debts that are involved in the process. This stay can be issued by the court and remains in place until the case is resolved. The court also issues a discharge order which orders the creditors to cease collection of any debts from the debtor. The primary way creditors are paid in a bankruptcy case is through the distribution of the debtor’s assets in a process known as liquidation. In this process, all of the debtor’s non-exempt assets (assets that can not be protected from creditors) are gathered and sold to generate funds to be distributed to creditors. All of the funds generated from this sale are then divided among creditors in order of seniority. This means that the creditors that are first in line to be paid will generally receive a greater portion of the funds generated than those lower on the list of creditors. Another way creditors can be compensated in a bankruptcy is through a reorganization plan. The court can confirm a plan that a debtor proposes to pay creditors with payments over time. This plan must be approved by the court and creditors in order to be enforced. All of the creditors must agree to the plan in order for it to be implemented, and they can choose to accept, reject, or amend the terms of the plan. In some cases, a debtor may be able to enter into a settlement agreement with creditors. These agreements are negotiated between the debtor and creditors, and generally involve the payment of a lesser amount than what is owed. This allows the debtor to pay off their debt and satisfy the creditors, with both sides agreeing to a reduced balance or payment amount.

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