The United States economy is built on one party providing a good or service to another party with the expectation of compensation. More expensive items may take a little longer to make full compensation.
Business owners understand this and are sometimes willing to allow the individual to make payments until the item is paid for in full. But what happens when the payments stop and the debtor declares bankruptcy?
The domino effect of bankruptcy
Debtors often declare bankruptcy to seek relief from overwhelming financial obligations. However, this relief can create a chain reaction and significant challenges for creditors. Bankruptcy can disrupt a creditor’s cash flow. When expected payments cease, the creditor may have difficulties meeting their own financial commitments, such as paying suppliers, employees and utilities.
Bankruptcy typically falls under two categories:
- 1. In a Chapter 7 bankruptcy, a debtor’s non-exempt assets are sold off to pay creditors. However, Georgia has exemption laws that protect some assets. Once the bankruptcy is discharged, most remaining unsecured debts are eliminated, meaning creditors may receive little to nothing.
- 2. A Chapter 13 bankruptcy is known as a “reorganization bankruptcy.” Debtors propose a repayment plan, typically three to five years long, to repay all or part of their debts. Creditors may receive a portion of what they are owed over the duration of this plan, but they have a better chance of recovering some funds compared to Chapter 7.
While bankruptcy provides debtors with protection and a fresh start, creditors do have some avenues available:
- To participate in any distribution under both Chapter 7 and Chapter 13 bankruptcies, they must file a proof of claim.
- Once bankruptcy is filed, an automatic stay immediately halts most collection activities. However, creditors can petition the bankruptcy court for relief from the stay.
Collecting a debt from someone who declared bankruptcy involves navigating the bankruptcy court system. Creditors have specific rights, so discuss your situation with someone who can help protect their interests.