In the United States, bankruptcy is supposed to benefit both the debtor and the creditor, but when people talk about bankruptcies the focus is typically on the debtor. But what about the creditor?
There are a list of dos and don’ts for creditors when a bankruptcy is filed. If you are a creditor and someone who owes you money files bankruptcy, all debt collection activities must cease immediately. It’s also important to determine whether the debt owed to you is secured or unsecured. The easiest way to understand the difference between the two is secured debt has a tangible item that is attached to it, like a home mortgage or car payment—-something that can be taken back if the debt goes unpaid. Examples of unsecured debt would include credit card, medical debt, and payday loans.
Depending on the type of bankruptcy the debtor has filed, creditors who hope to get repaid will need to submit a claim to the court and do so within a designated time frame. Secured debt always has to be repaid-—especially if the debtor wants to keep their home or car. The same is not true with unsecured debt. One of the main reasons debtors file for bankruptcy is to get rid of their unsecured debt—or as much of it as they can.
Let’s start at the beginning. Bankruptcy is governed by the federal law found in Title 11 of the Code of Law of the United States. And as a federal law, it supersedes state laws. The bankruptcy code permits anyone who files bankruptcy to keep basic assets believed essential for a “fresh start” after bankruptcy. Those basic assets are the debtor’s “exempt property.” With the exception of those exemptions, bankruptcy is the same state to state.
There are different types of bankruptcies outlined in the U.S. Bankruptcy Code. Each type is identified by the chapter of the code that describes it.
Chapter 7 Bankruptcy: This is the most commonly filed form of bankruptcy and is available to individuals, couples, corporations and partnerships. Even though they are common, not everyone qualifies for a Chapter 7. If someone earns more than the median income in their state they’ll have to take a “means test” to determine eligibility. Chapter 7’s are frequently referred to as a liquidation bankruptcy or complete bankruptcy. When a Chapter 7 Bankruptcy has been filed, a trustee will collect and sell the debtors nonexempt assets (if there are any) in order to make distributions to creditors in accordance with the law. Most Chapter 7 cases receive a discharge, releasing the debtor from personal liability for certain dischargeable debts.
Chapter 13 Bankruptcy: This is a repayment plan designed for individuals who have a regular source of income and a desire to pay their debts, but currently cannot. In a Chapter 13, the debtor usually is allowed to keep their property. The debtor may propose a payment plan (generally 3-5years long) illustrating how they will repay their creditors. This arrangement must be approved by the Court and payments are made to the creditors through a trustee. The debtor is then protected from lawsuits, wage garnishment and actual contact with their creditors for the designated length of the plan.
Chapter 11 Bankruptcy: This is a reorganization proceeding typically used for corporations and partnerships. However, increasingly, high net worth individuals are using Chapter 11’s to restructure their personal finances. In a Chapter 11 bankruptcy the debtor usually keeps their assets and continues to operate their business—-under the oversight of the court and a committee of creditors. The debtor proposes their reorganization plan, once accepted by a majority of creditors it must be confirmed by the Court.
Chapter 12 Bankruptcy: This is a simplified reorganization proceeding for family farmers or family fishermen modeled after Chapter 13 Bankruptcy. The debtor is allowed to keep their property and they pay their creditors out of future income. In the case of a Chapter 12, the court may grant a “hardship discharge” even if the debtor fails to complete their payment plan. This generally happens only if the debtor is unable to pay due to no fault of their own or because of circumstances beyond their control.
If you are a creditor and a debtor has filed bankruptcy you should:
• Stop all debt collection activities. This would include telephone calls, mailing billing statements, or pending law suits. The automatic stay protects the debtor from any collection activity.
• File a proof of claim. The bankruptcy notice sent by the court clerk will provide you with information regarding where to file the claim and the deadline for filing. Be prompt when filing, deadlines are strictly enforced.
• Determine if your claim is for secured debt or unsecured. Creditors of secured debt have a lien giving them rights to the property, which provides them collateral for their claim.
• Is your claim dischargeable? There are certain kinds of claims that are not dischargeable like certain obligations arising in divorce, debts incurred by fraud or damages arising from drunk driving.
• Monitor the case. Some bankruptcies are dismissed because the debtor fails to comply with the requirements. If this happens, creditors can pursue collection activity in accordance with the law.
A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners. Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 10 years.
There is an art to being successful at collections. The process requires, at the very least, some finesse to calm the “fight-or-flight response” many consumers experience when dealing with debt and those who collect it. Before you send out your first statement, there are some simple strategies you should be using that will make recovering money owed to you easier to do.
1. Accurate and detailed demographic information – This might sound like a no-brainer, but I can’t tell you how many accounts we’ve received for collections that are missing critical information. This type of information would include: name, address, home/cell phone numbers, date of birth, Social Security number, marital status, and place of employment. Don’t forget address and phone number of employer.
2. Have a financial agreement or contract in place – It’s important you communicate a clear understanding of your expectation of payment for services (or goods) received. Get legal advice when writing your agreement because the language in these types of documents is extremely important, especially if you want to be covered in case you have to take legal action in order to receive payment in full.
3. Verify information – When you have the opportunity to provide ongoing services, verify the information listed above each and every time. Please do not verify by asking, “Has anything changed since your last visit?” Many times this question will be answered with a “no” even when the answer is “yes.” In a medical setting, many patients only think about their insurance when contemplating changes and will answer “no” even though they might have moved a while ago. When verifying information always give the information you have on file, such as, “Do you still live at 1313 Mockingbird Lane, and can we still contact you at 555-1234?”
4. Due date – You don’t want your statement to end up at the bottom of the stack of bills. When sending out statements always have an actual due date. “Upon receipt” and “within 30 days” are ambiguous terms that oftentimes provide wiggle room for delaying payment.
5. Start your collection process quickly – When a due date has come and gone and no payment has been received, it is important to have a protocol in place in order to start the collection process. It could be a friendly reminder phone call or a letter–whatever you decide–but have a plan and begin it quickly. Fact: the older a debt becomes, the harder it will be to collect.
I know none of these tips are new or shocking, but sometimes reviewing the basics and making minor changes can result in major improvements.
Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners. Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 10 years.