By Erin T. Gray
Debtor vs. Creditor
This student written paper is informational only and is not intended to be perceived as legal advice. For such advice consult with a competent attorney who specializes in bankruptcy matters.
There has never been a more expansive time for personal bankruptcy in the history of America. Credit has been readily available in the past decade and debt management has been an afterthought by so many consumers.
For the typical consumer, there are two kinds of bankruptcy. Chapter 13 is the type of bankruptcy that allows one to pay back debt over a period of time. This process usually takes an average of five years. The other option is filing Chapter 7. Chapter 7 completely wipes out debt allowing a fresh start and a chance to rebuild credit worthiness. Before filing bankruptcy, it is now required that debtors go through a debt management course. Once completed, the debtor may hire an attorney (or be pro-se, which is when the debtor poses as his/her own representative) and file the chapter most appropriate for the situation. Once bankruptcy is filed, the debtor's attorney (or representative) must inform all of the creditors with a legal interest in the debtor or his/her property. Once the creditor is notified, it becomes a matter to be handled by the creditor's collection department.
Under the Chapter 13 bankruptcy code, the debtor must make a mutually agreeable repayment schedule to take care of missed payments and outstanding debt. This form of bankruptcy is better for the consumer with more secured debt, (secured debt is when the creditor has a lien or legal right to property in exchange for lending money.) The reason Chapter 13 is better for consumers with secured debt is because in most cases, the consumer will keep his/her property and as long as the agreed repayment schedule is maintained. A discharge may be reached in about five years. A discharge, according to William L. Norton III and Roger G. Jones is:
The principle goal of an individual debtor who files a Chapter 7 or Chapter 13 petition… The discharge granted a debtor is the "fresh start" which resort to bankruptcy affords. A discharge granted under the Bankruptcy Code relieves the debtor of the legal obligation to pay the discharged debts.
In every Chapter 13 case, a trustee is assigned. The trustee is frequently an attorney who has been appointed by the residing bankruptcy judge to oversee the plans and funds of the debtor. The debtor and attorney meet to develop a plan to fulfill the requirements of the bankruptcy and the creditors involved. The plan then must be approved by all parties. The trustee is given most of the debtor's income (other than money for necessities) and then disburses it to the creditors as the plan provides. This particular chapter allows the debtor more time and a little more ease with the handling of accumulated debt while still repaying creditors.
Chapter 7 is executed differently. Chapter 7 works out better for the debtor with more unsecured debt. Unsecured debt includes such things as credit cards and other lines of credit such as check loans. This chapter requires liquidation of the debtor's personal property. There are parts of the law that allow the debtor to claim some things as exempt. According to Free Advice, a website offering advice for consumers on matters that are hard to understand, "the debtor can retain certain property that is specifically 'exempt' under his/her choice of Federal law or his/her State's law, such as tools of one's trade, limited equity in a car and house, and some personal effects." Once a debtor has completed Chapter 7 Bankruptcy proceedings and discharge is achieved, the debtor is unable to file again for eight years.
Debt collection is a profession that has very clear and concise laws as to how a collector may handle themselves with a debtor. The Fair Debt Collection Practices Act, amended in September 30th, 1996, was created to keep debt collectors in line. According to Section 802 of the Act entitled, "Congressional Findings and Declarations of Purpose,"
There is abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors. Abusive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.
Debt collectors have to be careful to be sure they are speaking with the debtor and the debtor only, as it is illegal to release any information to anyone but the debtor without their consent. It is also important for the debt collectors to handle themselves appropriately in the case of bankruptcy. As stated previously, the debtor is protected once bankruptcy is filed. Many times when debtors call their creditors with questions about their bankruptcy, they are shunned away and advised to contact their attorney.
The most influential way the debtor is protected by bankruptcy is with the automatic stay. When the debtor files bankruptcy, the creditor is prevented from filing any law suits, continuing with repossession or foreclosure, making any collection calls, and filing for any garnishments or levies. Repossession is when the creditor seizes whatever property held as collateral, in most cases it is a vehicle. Foreclosure is when the lending institution reclaims the piece of real property for which they hold a mortgage or home equity. Garnishment is when the creditor files a court order to have money the debtor earns go directly to the creditor to satisfy an outstanding debt. Also, a levy is filed to collect outstanding debt from the debtor in the form of filing a legal judgment. As Arnold Cohen and Mitchell Miller explain, "the basic policy behind the automatic stay is to promote the orderly administration of the estate while relieving the debtor from the pressures that drive the debtor to bankruptcy." Most frequently, it is secured creditors who want to relieve that stay so they might be able to continue with their standard procedures of further action. In order for them to get the relief, it is required that they file for it through the court. The judge will then review the request and make his or her decision. The most common way for the stay to be lifted is if the debtor has no insurance or equity in the said collateral. Once the stay is lifted foreclosure or repossession usually follows.
The automatic stay also comes into play when the debtor surrenders the property or his/her property has been repossessed and then bankruptcy is filed. The lending institution is prohibited from selling the property until the relief has been granted. For example, if a debtor surrenders a vehicle at the beginning of March, the bank may then bring the vehicle to an auto action for cleaning and then selling. The debtor may file bankruptcy shortly after the repossession goes through setting the automatic stay into place. The vehicle then has to sit until the judge allows the lift of stay which in some cases has taken months. Thus, the vehicle is unable to be sold until a later date.
In Chapter 7, secured creditors first seek a reaffirmation. If no reaffirmation is filed, they are allowed to send one letter indicating that the property will be seized if the account remains defaulted. Default on the account depends on the contract but is usually referring to delinquency or non-payment. Commonly, a debtor will take heed to a letter such as this and work something out to satisfy the lending institution. In some cases, however, the lending institution will receive no obvious response from the debtor, after which they file for the relief of stay and continue with further action once it is granted. Filing for the relief of stay is the creditors' only remedy at this point. Any other action is prohibited under the law. As mentioned earlier, the creditor may send one letter to the attorney and then the rest is a waiting period. However, if the debtor happens to have a co-signer on the account, the creditor may begin to contact that person and demand payment. If the co-signer does not have the collateral and cannot get the debtor to make amends with the account, the creditor may even go as far as to begin legal action with the co-signer as a way of satisfying the debt.
When a creditor is faced with a Chapter 13 bankruptcy there are a number of steps to be taken. First, when the debtor is writing up the plan with the attorney, often an attempt would be made to minimize the debtor's obligation to repay by "cramming down" the values of each piece of property. If the debtor owes significantly more than the value of the collateral, they are allowed to try and adjust the amount they have to pay back based on the value. In the case of motor vehicles creditors formerly would use book values (such as Kelly Blue Book and NADA) but recently they have begun to use what the vehicle would sell for on the lot, which has assisted creditors in their fight to avoid a loss. After the amount is settled, the creditor has to make sure the actual account balance reflects the amount to be paid through the plan. After that, there is a waiting period for the trustee to begin payments. There is the possibility in Chapter 13 for consumers to "not include" certain accounts in the bankruptcy, which is called "paying outside the plan." "Not include" is in quotations because debtors frequently believe that they are leaving a creditor out of the bankruptcy not realizing that all creditors are included and affected. When a debtor decides to pay an account outside the plan, it means he/she will continue to make payments as usual. If at any point the debtor defaults on the account, the creditor may contact the debtor's attorney to remind the debtor to make the payment.
Though it is often drawn out and redundant, it is important that people understand the collection process and the bankruptcy laws. Bankruptcy can severely damage a debtor's credit for up to ten years. With all of the temptations of credit around these days and the constant reminders of new technology consumer products and nice clothes, people can easily allow their debt to get out of hand. Bankruptcy filings are at an all time high and the public needs to be aware that this course of action should be taken very seriously. The relationship between bankruptcy and creditor collection is strong. Through the expansion of the laws and regulations of bankruptcy, things are becoming more balanced rather than one side benefiting and the other losing out. Bankruptcy should not be an excuse or a way to cheat someone. Bankruptcy laws were enacted to help those in desperate financial times to have a viable second chance.
Some terms and definitions of bankruptcy proceedings follow.
Terms as defined by the Federal Trade Commission:
"Consumer" means any natural person obligated or allegedly obligated to pay any debt.
"Creditor" means any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.
"Debt" means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.
"Debt collector" means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
The author, Erin T. Gray, is a student at Schenectady County Community College where her major is Business Administration.