Across the country, Courts are seeing more and more debt-collection cases flood the courtrooms. Most of the cases involve credit card collections, foreclosures, or evictions. This proverbial debt collection crisis is the result of the economic crash that occurred in 2008, which caused housing values to plummet and major lenders to shut their doors. In turn, this debt collection crisis has translated into more and more people filing for bankruptcy which includes both Chapter 7 bankruptcy and Chapter 11 bankruptcy. As a result, the way debt collection agencies and debt collection lawyers practice has changed significantly. This article will address the issues that face the creditor in a bankruptcy and its impact on debt collection.
What happens if the debtor files for bankruptcy?
One of the most powerful features, and consequently one of the main reasons people pursue a bankruptcy to discharge their debt it, is that bankruptcy stops creditors from pursuing you for debt collection. Once filed, most collection activity must cease and go through the bankruptcy court. It goes without saying then that once a debtor files for bankruptcy you should consult with an experienced attorney to determine whether the debtor is eligible for bankruptcy relief. Your bankruptcy attorney should be familiar with the rules regarding Chapter 7 bankruptcy and Chapter 13 bankruptcy, or even Chapter 11 bankruptcy if the bankruptcy debtor wants to remain in bankruptcy because the debtors’ income exceeds the means test.
After the debtor files for bankruptcy an automatic stay goes into effect. The automatic stay prohibits bankruptcy creditors from taking any action to collect on the debt the bankruptcy debtor owes to the creditor. Again, there are a few exceptions to what kind of debt is discharged in a Chapter 7 bankruptcy and Chapter 13 bankruptcy, and the creditor should consult with an experienced bankruptcy attorney to determine whether debt collection can proceed. Once the bankruptcy creditor receive notice that the debtor has filed for bankruptcy, a lawyer experienced with debt collection and personal bankruptcy law will analyze the case and determine whether you can object to the debtors bankruptcy and file a motion to lift the automatic stay.
Whether a bankruptcy automatic stay can be put in place by the bankruptcy creditor depends on the type of bankruptcy that the bankruptcy debtor has filed. Since a Chapter 13 Bankruptcy is more favorable to a bankruptcy creditor, most debtors attempt to pursue filing a bankruptcy through Chapter 7. If this happens, all is not lost, as in certain instances a case initially filed under Chapter 7 can be converted to a Chapter 13 or dismissed.
In a Chapter 7 bankruptcy, the debtor surrenders all nonexempt property to an appointed bankruptcy court trustee. The Chapter 7 trustee then liquidates the property through sales, and the proceeds of the bankruptcy sale are distributed to priority creditors. After the priority creditors are paid, the remaining balance is divided amongst any unsecured creditors. In most Chapter 7 bankruptcy cases, assets rarely trickle all the way down into the hands of the unsecured creditors. Thus, most unsecured creditors would rather see a debtor pursue a Chapter 13 bankruptcy rather than file a Chapter 7 bankruptcy.
In Arizona, an individual is not eligible to file a Chapter 7 bankruptcy unless:
1. Their income for the six months prior to bankruptcy filing is less
than the median income for the same size household in Arizona, or
2. Their monthly “disposable income” (the amount of income left
over per month after subtracting living expenses per modified IRS
guidelines) is less than a minimal allowed amount (income is based on an
average of the six months prior to filing);
3. Their debts are not primarily “consumer debts.”
These rules do have exceptions, and determining whether a person is eligible for Chapter 7 bankruptcy requires a thorough investigation into their financial information.
Chapter 13 Bankruptcy and whether debt collection can proceed
If the debtor is unable to file a Chapter 7 bankruptcy, then they will usually find themselves in bankruptcy court under Chapter 13 of the bankruptcy code. Under Chapter 13, the bankruptcy debtor is seeking to reduce their debt, and negotiate a debt adjustment. The Chapter 13 bankruptcy differs from the Chapter 7 in a number of ways. Specifically, in a Chapter 13 bankruptcy the bankruptcy debtor must turn over all of their disposable income to the bankruptcy trustee for a period of three years, must disperse any increases in disposable income to those creditors, and must seek the bankruptcy court’s permission to engage in significant activities outside the ordinary course of business. Thus, most attempt to file under Chapter 7 of the bankruptcy code rather than Chapter 7.
In cases where the debtor has filed under Chapter 13, or it has been converted to a Chapter 13 from a Chapter 7 bankruptcy, an debt collection attorney has a number of options at their disposal when a debtor is seeking relief under the bankruptcy code. After filing a notice of appearance, a debt collection attorney should review the amount of debt that the debtor owes the bankruptcy creditor. The attorney should also check to see how many other creditors have a claim. Being proactive at this point is what can make or break your chances of recovering a substantial percentage of the debtor’s obligations.
As mentioned above, a Chapter 13 bankruptcy is more favorable to the creditor. Once filed, the debtor will propose a Chapter 13 plan of repayment, which can provide for full, partial, or no planned repayment of unsecured claims. Interestingly enough, a substantial portion of the payments promised to secured creditors under Chapter 13 plans are never made. Thus, it is important that the creditor and its debt collection attorney be familiar with the guidelines of Chapter 13 and Chapter 7 bankruptcies since a single question can turn a Chapter 13 into a Chapter 7 Bankruptcy. In doing so, the experienced debt collection attorney could save their clients thousands of dollars that would otherwise not be accessible in a Chapter 7 bankruptcy.
Increasing the chances of successful debt collection
In today’s economy, it is a race against the clock for creditors. With the passage of time comes the chance that the economic, psychological, and legal factors will strain a debtor to their limit and force them to file bankruptcy. A vast majority of debtors default on their obligations because they have an inability to pay. It is vital to your business to ensure that your collections procedures are efficient, and being handled by an experienced debt collection attorney.
For the purposes of successful debt collection, it is helpful for the creditor remember that by being proactive they may be able to obtain payment, whereas the same action at a later time can result in nothing. Therefore, it is vitally important to seek the advice of an experienced debt collection attorney that is versed in both debt collection law and in bankruptcy law.
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