Debt Collection and Bankruptcy, What’s a Creditor to do?

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March 25, 2021 by Lisa Brammer

In the United States, bankruptcy is supposed to benefit both the debtor and the creditor, but when people talk about bankruptcies the focus is typically on the debtor. But what about the creditor?

There are a list of dos and don’ts for creditors when a bankruptcy is filed. If you are a creditor and someone who owes you money files bankruptcy, all debt collection activities must cease immediately. It’s also important to determine whether the debt owed to you is secured or unsecured. The easiest way to understand the difference between the two is secured debt has a tangible item that is attached to it, like a home mortgage or car payment—-something that can be taken back if the debt goes unpaid. Examples of unsecured debt would include credit card, medical debt, and payday loans.

Depending on the type of bankruptcy the debtor has filed, creditors who hope to get repaid will need to submit a claim to the court and do so within a designated time frame. Secured debt always has to be repaid-—especially if the debtor wants to keep their home or car. The same is not true with unsecured debt. One of the main reasons debtors file for bankruptcy is to get rid of their unsecured debt—or as much of it as they can.

Let’s start at the beginning. Bankruptcy is governed by the federal law found in Title 11 of the Code of Law of the United States. And as a federal law, it supersedes state laws. The bankruptcy code permits anyone who files bankruptcy to keep basic assets believed essential for a “fresh start” after bankruptcy. Those basic assets are the debtor’s “exempt property.” With the exception of those exemptions, bankruptcy is the same state to state.

There are different types of bankruptcies outlined in the U.S. Bankruptcy Code. Each type is identified by the chapter of the code that describes it.

Chapter 7 Bankruptcy: This is the most commonly filed form of bankruptcy and is available to individuals, couples, corporations and partnerships. Even though they are common, not everyone qualifies for a Chapter 7. If someone earns more than the median income in their state they’ll have to take a “means test” to determine eligibility. Chapter 7’s are frequently referred to as a liquidationbankruptcy or complete bankruptcy. When a Chapter 7 Bankruptcy has been filed, a trustee will collect and sell the debtors nonexempt assets (if there are any) in order to make distributions to creditors in accordance with the law. Most Chapter 7 cases receive a discharge, releasing the debtor from personal liability for certain dischargeable debts.

Chapter 13 Bankruptcy: This is a repayment plan designed for individuals who have a regular source of income and a desire to pay their debts, but currently cannot. In a Chapter 13, the debtor usually is allowed to keep their property. The debtor may propose a payment plan (generally 3-5years long) illustrating how they will repay their creditors. This arrangement must be approved by the Court and payments are made to the creditors through a trustee. The debtor is then protected from lawsuits, wage garnishment and actual contact with their creditors for the designated length of the plan.

Chapter 11 Bankruptcy: This is a reorganization proceeding typically used for corporations and partnerships. However, increasingly, high net worth individuals are using Chapter 11’s to restructure their personal finances. In a Chapter 11 bankruptcy the debtor usually keeps their assets and continues to operate their business—-under the oversight of the court and a committee of creditors. The debtor proposes their reorganization plan, once accepted by a majority of creditors it must be confirmed by the Court.

Chapter 12 Bankruptcy: This is a simplified reorganization proceeding for family farmers or family fishermen modeled after Chapter 13 Bankruptcy. The debtor is allowed to keep their property and they pay their creditors out of future income. In the case of a Chapter 12, the court may grant a “hardship discharge” even if the debtor fails to complete their payment plan. This generally happens only if the debtor is unable to pay due to no fault of their own or because of circumstances beyond their control.

If you are a creditor and a debtor has filed bankruptcy you should:

• Stop all debt collection activities. This would include telephone calls, mailing billing statements, or pending law suits. The automatic stay protects the debtor from any collection activity.
• File a proof of claim. The bankruptcy notice sent by the court clerk will provide you with information regarding where to file the claim and the deadline for filing. Be prompt when filing, deadlines are strictly enforced.
• Determine if your claim is for secured debt or unsecured. Creditors of secured debt have a lien giving them rights to the property, which provides them collateral for their claim.
• Is your claim dischargeable? There are certain kinds of claims that are not dischargeable like certain obligations arising in divorce, debts incurred by fraud or damages arising from drunk driving.
• Monitor the case. Some bankruptcies are dismissed because the debtor fails to comply with the requirements. If this happens, creditors can pursue collection activity in accordance with the law.

Founded in 1950, United Credit Service, Inc. is a full service revenue cycle management and debt collection agency in Wisconsin providing highly effective, customized one on one management and recovery solutions for our business partners. We offer pre-service collection solutions as well as traditional back-end collections. Visit our website at http://www.unitedcreditservice.com or call 877-723-2902.

 

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