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How Bankruptcy Affects Debt Collection

 Posted on May 01, 2017 in Bankruptcy

How Bankruptcy Affects Debt CollectionBankruptcy is one of a debtor’s most powerful tools to avoid paying off debt owed to a creditor. If granted bankruptcy, debtors may be able to absolve themselves from responsibility for some of their debts. When a debtor files for bankruptcy, the court can place an automatic stay on the creditor’s debt collection efforts until it decides on the bankruptcy case. Creditors can object to the automatic stay or the bankruptcy claim. Creditors have two types of bankruptcy they most often deal with, each having a different effect on their ability to collect debts.

Chapter 7

Chapter 7 bankruptcy is considered favorable for debtors who do not own many high-value assets. In order to qualify for this form of bankruptcy, the debtor:

  • Must have a monthly income that is less than the median monthly income for households of the same size; or
  • If the monthly income is greater than the median income, must not exceed a maximum disposable income amount after accounting for monthly expenses.

The debtor’s non-exempt assets are sold, and the proceeds are used to pay creditors. Creditors with priority claims are paid first, and the other creditors divide the remaining money. Exempt assets include:

  • A home the debtor has no more than $15,000 interest in;
  • One motor vehicle the debtor has no more than $2,400 interest in;
  • Necessary clothing;
  • Pensions and some retirement accounts; and
  • A $4,000 exemption that can be used on any property.

Once the asset proceeds are dispersed, most forms of remaining debt are cancelled.

Chapter 13

Creditors potentially have more surety in their compensation through chapter 13 bankruptcy. The debtor must come up with a three- or five-year repayment plan, depending on his or her monthly income. The debtor must try to repay his or her entire debt, even if it means all of the debtor’s disposable income will go towards the repayment plan. Creditors should analyze the repayment plan in case the debtor is trying to understate the debt.

Secured Creditors

Some debts cannot be discharged by filing for bankruptcy, including:

  • Payments established as part of a divorce;
  • State and federal taxes;
  • Criminal fines; and
  • Student loans.

Secured creditors are also exempt from some debt collection restrictions that bankruptcy creates. For debts such as home mortgages and car loans, the debtor must compensate the creditor, either through asset liquidation proceeds or continued payments. Otherwise, the creditor can claim the collateral property.

Bankruptcy Court

Creditors can lose some of the money owed to them if a debtor enters bankruptcy. A Chicago creditor’s rights attorney at Dimand Walinski Law Offices, P.C. can determine whether you may object to the bankruptcy claim in order to continue your debt collection efforts.


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