Different Types of Bankruptcy
A collector must have a working knowledge of bankruptcy laws as they pertain to the collection of bad debt. There are different types of bankruptcy that will have an impact on what recourse is available for recovery of bad debt. Bankruptcy will protect an individual or company from lawsuits and seizure of assets.
The three forms of bankruptcy that someone in a collections job must be familiar with are chapter 7, chapter 11, and chapter 13 bankruptcy. In daily operations, a collector may be required to use court verification systems to verify the status of a bankruptcy filing.
Chapter 7 pertains to individual consumers. Filing a chapter 7 bankruptcy will dissolve all debt. Once the borrower has filed Chapter 7, the collector may no longer contact the borrower to collect the debt. When the case discharges, the borrower no longer is required to pay the debt. However, if dismissed, collection activity may resume. There are some types of debt that may not be included in bankruptcy, such as past due taxes and student loans.
Chapter 13 is a reorganization of debt. The purpose of Chapter 13 bankruptcy is to remain in control of collateral, such as house or a car. The payments for the debt undergo a restructure. Payments go to a court appointed trustee, who then disburses payments to the creditors. Creditors will have to submit a claim to the court in order to become included in the list. The court will mandate a set amount for payment of debt. Payment will first go to secured debt, then down the list.
If there are no funds available to pay unsecured debt, the creditor will not receive payment.
Chapter 11 is a form of bankruptcy used by businesses only, whether they are a corporate or a sole proprietorship. Chapter 11 is similar to Chapter 13 as it is a reorganization of debt, where the borrower remains in possession of assets, and repayment becomes mandated by the court under new terms. Consumer collectors will not run into Chapter 11 bankruptcy. Chapter 11 finds use in commercial purposes only. A business conversely may also file Chapter 7. Commercial use of Chapter 7 will dissolve the business and liquidate all assets to repay creditors.