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The modern world runs on debt. People and businesses borrow money for housing, education, medical care, transportation, consumer goods, and many other things. However, sometimes debts don’t get repaid and creditors need legal help to get what they are owed.

Whether it’s a borrower defaulting on a loan, a customer failing to pay for merchandise bought on credit, or any other situation, a failure to repay can leave a creditor in a bad position. While banks, credit card companies, and other large lenders have enough data to spread risks out, smaller businesses are often vulnerable to defaulting debtors. When that happens, it may be time to get professional assistance.

The law of debt collection is complicated, and it gets even more complicated when a debtor files for bankruptcy. There are many ways to end up in legal trouble by trying to collect what you’re owed. Whether you’re dealing with a debtor who simply isn’t paying or someone in bankruptcy, it’s a good idea to consult an attorney who will notify you of your rights, protect your rights, make sure you stay on the right side of the law and collect as much of what you are owed as possible.

Debt Collection Outside of Bankruptcy

Although the vast majority of debts are paid in full and on time, debtors do sometimes fail to pay what they owe. When informal debt collections like phone calls or dunning (warning) letters don’t work, the law gives creditors several options to collect what they are owed.

Secured creditors can repossess the asset that secures their debt. A secured debt is one where the debtor agrees to let the creditor repossess it if the debtor fails to pay. Common types of secured debts are car loans and mortgages on real estate. 

Repossession of assets other than a person’s home usually does not require a legal proceeding. Thus, it’s one of the quickest and easiest ways to recover on a debt. However, it’s still worth consulting a lawyer before repossessing because the law places limits on repossession attempts.

If a debt isn’t secured and the debtor isn’t paying what they owe, the creditor must resort to the legal process. This involves filing a lawsuit against the debtor and obtaining a judgment in court. Once the creditor has a judgment, they have two collection options available: levying assets and garnishing income.

Levying involves having a county sheriff seize the debtor’s property and auction it off, giving the proceeds to the creditor. Garnishment means filing a legal proceeding against the debtor’s source of income (usually an employer) to direct a portion of that income to the creditor instead.

Both levying and garnishment are complicated legal processes that are much easier to navigate with the help of a lawyer. The law limits the types of assets that can be levied and the amount of income that can be garnished. An experienced collections attorney can handle these processes for a creditor and make sure the creditor gets as much of what they are owed as possible.

Dealing with Bankrupt Debtors

Once a debtor files for bankruptcy, a creditor’s situation completely changes. A bankruptcy filing triggers an automatic stay that prohibits almost all creditors from making any attempt to collect debts from the debtor outside of the bankruptcy proceeding. In effect, all of a creditor’s normal debt collection options disappear and all of the debtor’s creditors are forced into the bankruptcy proceeding.

Bankruptcy comes in several forms, but the central idea is always the same: the debtor pays what they can to creditors in exchange for a discharge of debt. In practice, debtors almost never have enough to pay all their debts, so bankruptcy law has rules determining how much each creditor receives.

At the beginning of a bankruptcy, all of a debtor’s creditors are notified of the proceeding. To collect anything, a creditor will need to file a proof of claim form establishing how much they are owed. Some creditors may be asked to return payments received shortly before the bankruptcy was filed. Creditors also receive a chance to question the debtor about inconsistencies in their filing.

Read more about Adversary Proceedings here.

Regardless of the form a bankruptcy takes, a creditor’s ability to be repaid depends on whether they hold secured or unsecured claims and whether they have priority. Under the priority system, certain claims like alimony or child support are paid before other unsecured claims. Secured creditors keep the right to repossess once the bankruptcy is over, which means debtors have an incentive to reaffirm their debts and keep paying after bankruptcy.

In a chapter 7 bankruptcy, a court-appointed trustee sells off the debtor’s assets and distributes the proceeds to the creditors. Once any proceeds are distributed, the debt is discharged and creditors cannot make any further attempts to collect.

In a chapter 13 bankruptcy, the debtor pays their disposable income to all their creditors over the course of three to five years. Once the repayment plan is completed, all debts are discharged and creditors cannot make any further attempts to collect.

Business reorganization bankruptcies happen under chapter 11. Chapter 11 bankruptcies are by far the most complicated. The business’s owners and creditors negotiate a reorganization plan that lays out how much payment the creditors receive and keeps the business operating during and after the proceeding.

All bankruptcies are complex legal proceedings with tight deadlines and a lot of paperwork. Technical mistakes can prevent a creditor from receiving what they are owed or even result in penalties. Sometimes, complex disputes arise and require litigation in court. For these reasons, it’s wise for any creditor whose debtor has declared bankruptcy to hire a lawyer to guide them through the bankruptcy process.

What Should I Do if I Need Help Collecting a Debt?

If you need help collecting a debt and/or need assistance for a 341 meeting, contact Rosenblum Law for a free consultation today. Our experienced attorneys know how to navigate debt collection both inside and outside of bankruptcy and can get you as much of what you are owed as possible. Call 888-815-3649 or email us today.