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Amy Nickson On 19th Feb,20
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Does bankruptcy protect both the creditors and debtors?
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Many people are in credit card debt, medical debt, and student loan debt.
Now, it’s very common to find yourself in heavy debt, which is beyond your control. Under such circumstances, you can consolidate your debt or go for a debt settlement program to lessen your debt burden.
But, if you can't afford to consolidate or settle your debts, then, you could file bankruptcy to start afresh.
Bankruptcy provides a clean slate to the debtors once the case is over. However, that doesn't mean that creditors get injustice. Bankruptcy also caters to certain advantages to the creditors.
The Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law by President George W. Bush on 20th April, 2005. This Act provides help to the creditors who might not be able to pay back if the bankruptcy court discharges the debtors of their debts. Consequently, very few debtors can file chapter 7 bankruptcy and discharge their debts in three months. However, a lot of debtors file for bankruptcy and the creditors ought to be conscious of their legal rights.

Read the article to understand the benefits of bankruptcy for creditors and debtors

How does bankruptcy help debtors?

Bankruptcy helps people who are struggling with huge debts. The debtors can start afresh through the bankruptcy process. Here’s how bankruptcy helps people in debt.

  • Automatic stay

    Debtors generally file bankruptcy when they know that they cannot pay the overwhelming due amount to their creditors.
    Once the debtors file bankruptcy, they breathe a sigh of relief since an immediate automatic stay is issued by the court.
    As soon as a creditor obtains notice of bankruptcy, he should stop all collection activities. The creditor must discontinue sending bills, making collection calls or pursuing court cases against the debtor. This may not seem to be a good thing for the creditor, but the responsibility for collecting the debt will be transferred from the creditor to an appointed bankruptcy trustee.

  • Allocation of payment

    When you file for a chapter 7 bankruptcy, the trustee sells your property to repay your creditors. After selling your property, the trustee will make use of the proceeds to pay back the creditors. The payment is distributed following the precedence of claims. If you file for a chapter 13 bankruptcy, you will offer to pay back your creditors through a debt repayment plan. The bankruptcy court gives its consent to the plan, and you make payments to the trustee based on the monthly repayment plan. The payment is then distributed by the trustee to each of the creditors in accordance with priority. In both types of bankruptcy, creditors bear the risk of not being paid back if they have non-priority claims.

  • Debtors can wipe out unsecured debts

    In bankruptcy, debtors can get out of their credit card debt and other no priority unsecured debts. Chapter 7 bankruptcy helps debtors to get out of unsecured debts with 3-4 months. Chapter 13 bankruptcy helps the debtors to get out of unsecured debt through a debt repayment plan, which generally takes 3-5 years to complete.

  • Debtors can wipe out secured debts

    In bankruptcy, debtors can get out of their secured debts if they can’t afford a payment that they secured with collateral (mortgage or Car). But, the debtors can’t keep the collateral such as house, car, or other items that they used as collateral.

How does bankruptcy help creditors?

Bankruptcy helps the creditors too when it comes to paying off debt. In most cases, the creditors get back their money. Here’s how the creditors get benefit from the bankruptcy case:

  • Creditors get back the money to the extent possible

    In a bankruptcy case, the trustee has to check whether or not the creditors get back to the extent possible before discharging a debtor’s debts. Creditors have the right to get the share in payment from the bankruptcy estate based on the priority of claims.

  • Creditors have the right to get compensated

    Creditors are entitled to be heard with regard to the debtor’s assets that are nonexempt. Creditors can challenge the debtor’s right to a discharge.

  • Evidence of claim (Secured)

    The bankruptcy notice that is sent to the creditor will inform the creditor about where to file evidence of the claim and the time limit for doing the same. On the form for proof of claim, the creditor must include the following:

    1. Information regarding the creditor
    2. The case and court number
    3. Basis for claim
    4. Court judgments (if any)
    5. The net amount of claim when the case was filed
    6. Type of claim – secured, unsecured non-priority or unsecured priority
  • Evidence of claim (Unsecured)

    A creditor with lien has the right to get the value of the debt or collateral, but unsecured creditors don't have the same right. Unsecured creditors can file a proof of claim to get the debtor's deposition.

    However, in most cases, unsecured creditors are not entitled to be paid in Chapter 7 and chapter 13. However, this is based on the number of secured debts the debtor has incurred.

    A replica of any judgments or contracts relevant to the claim must be affixed by the creditor. In case these attachments are lengthy, the creditor ought to affix a summary to the official form for a proof of claim.

Lastly, though bankruptcy might negatively affect an individual’s credit rating for many years, it is a helpful way for ill-fated debtors to regain their economic stability and start their life afresh. Thus, bankruptcy is quite beneficial for both creditors and debtors.

Last Updated on: Wed, 19 Feb 2020

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