There are two types of consumer bankruptcy filings that many creditors will likely encounter. A Chapter 7 and a Chapter 13. In a Chapter 7, the debtor is attempting to liquidate his/her assets. In a Chapter 13, the debtor is proposing to pay creditors some of what creditors are owed over time (3-5 years.). In a Chapter 13, the debtor will file a Chapter 13 Plan which sets forth how the debtor plans to pay back creditors and how much they propose to pay.
What do you do when learn there is a bankruptcy filing? Immediately upon the filing of a bankruptcy petition the automatic stay is in effect which means that any and all actions and collection efforts against property of the bankruptcy estate must stop. All collection efforts and any notices seeking to collection money from the debtor must stop. In addition, do not speak with the debtor and do not send further notices to the debtor. All communications must go through debtor’s counsel.
So what is the purpose of filing for bankruptcy? It is to obtain a discharge. Once a discharge order is entered, with some exception regarding certain types of debts; it means that the debtor is no longer personally liable for the debt owed. This means that a creditor cannot pursue any wage executions, bank levies, or personal property levies for debt that is owed pre-petition (before the date of the bankruptcy filing). However, judicial liens (as well as some other types of liens) are not automatically discharged and can be pursued. Consulting an experienced attorney regarding this issue is key to avoid failing to preserve and protect certain rights.
In both a Chapter 7 and Chapter 13, a creditor may file a motion for relief from the automatic stay. The purpose of obtaining relief from the automatic stay is for the creditor to pursue their State Court remedies with respect to the property that is the security for the debt owed.
So how does a bankruptcy end? A discharge and final decree is entered. Once a final decree is entered and the case closes the creditor is free to pursue all post-petition debts owed by the debtor. Very important to note is once the discharge is entered, creditors are barred from collecting pre-petition debt. Pursuit of the pre-petition debt may result in possible sanctions and fines.
Generally, a Chapter 7 case will take about 4-6 months from petition to discharge and case closure. A Chapter 13 will depend upon the proposed Chapter 13 Plan however; generally a plan will be between 3-5 years (from the petition date to discharge and case closure) unless the debtor does not make their plan payments, whereby the case would be dismissed. Upon dismissal a creditor may freely pursue their collection efforts.
When a consumer files for bankruptcy protection, knowing how to collect and what rights a creditor has in the bankruptcy case is crucial for avoiding possible sanctions and for turning delinquent accounts into cash.