Understanding what can occur during a collection action can be vital in determining which accounts to pursue. One common occurrence is that a debtor files for bankruptcy.
There are two (2) types of consumer bankruptcy filings that may likely be encountered during a collection action. The first is a Chapter 7 Liquidation, meaning that the debtor is liquidating his/her assets. The second is a Chapter 13 Reorganization, in which the debtor proposes to pay creditors some of what creditors are owed over time (3-5 years.); the debtor will file a Chapter 13 Plan that sets forth how the debtor plans to do it.
The purpose of filing a bankruptcy is for the debtor to receive a discharge from personal liability for pre-petition debt (debt incurred prior to the date of the bankruptcy filing). The bankruptcy filing provides a stay of any collection actions against property of the debtor’s estate, including wage execution and bank levies.