Bankruptcy Considerations in Collection Actions
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.
Should you receive a bankruptcy notice, immediately stop all collection efforts. All communication with the debtor must be through their bankruptcy counsel.
A secured creditor can still pursue its secured property by getting bankruptcy court approval. An order for relief from the automatic stay permits the creditor to pursue that property, i.e., through replevin action or foreclosure.
Another very important step to take in a Chapter 13 is for the creditor to file a Proof of Claim for any and all pre-petition amounts owed. This must be filed by a certain deadline established in each case, and it is vital that it not be missed.
Generally speaking, a Chapter 7 may take around 4-6 months from the Petition Date (date of filing) to discharge and case closure, while a Chapter 13 typically takes around 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.
Many things can occur during a collection and bankruptcy action; knowing how to navigate those occurrences will help business owners understand which accounts can be collected and when counsel needs to get involved, which ultimately will reduce unnecessary attorney fees and wasted time.