What form of debt is owed to you determines your rights as a creditor to have the debtor pay you back.
Debt comes in two main categories:
- Debt that is secured by assets is referred to as secured debt: For instance, if a borrower takes out a loan to purchase a home, the home serves as the security for the loan. The creditor may seize the home to satisfy the debt if the debtor doesn’t pay the mortgage.
- Unsecured debt is a loan without any collateral: For instance, a house or car are not used as collateral for credit card debt.
Secured Debt Not Repaid
A secured creditor usually has the ability to obtain the asset that the debt is secured to, frequently by way of seizure or foreclosure.
Repossession is a method of recovering outstanding debt if the attached property is a car, piece of furniture, or major equipment. There are several methods for repossessions:
- Engage the services of a company that specializes in property repossession: If you decide to use a repossession business, it’s crucial that you choose one that is reliable and insured. Otherwise, you can end up in legal trouble if they breach the law.
- You can sue the debtor and request that the sheriff reclaims the property: Let the sheriff handle it. The safest approach is this one, although it can be expensive and time-consuming.
- You can reclaim the property on your own, albeit it is not advised: But you can’t “breach the peace” in doing so, which means you have to take the property back without provoking anyone or disobeying the law. You risk being sued by the debtor for infringing their rights if you do disturb the peace. If you are not well-versed in the repossession rules in your area, choosing this choice is quite risky.
To get the outstanding obligation fulfilled by the sale of the connected property, the creditor may file for foreclosure if the property is a house or another type of real estate.
Defaulted on Unsecured Debt
A secured debt is typically easier to collect than an unsecured one. Try to collect the debt on your own by sending demand letters and reminder invoices as the initial stage in the collection procedure. After then, you can work with a collection agency if the bill is not paid. The last resort is to sue the debtor if the collection agency is unsuccessful.
What Is Bankruptcy?
A debtor may file for bankruptcy in order to get some of their obligations discharged or to restructure their debts so that they can manage repayment of at least some of them.
When a creditor learns that a debtor has filed for bankruptcy, they may doubt their ability to get their money back.
What Happens If a Debtor Files for Bankruptcy? How Can a Creditor Recover?
When a debtor files for bankruptcy, creditors are entitled to certain protections. The bankruptcy procedure demands that a debtor pay off as many debts as they can before some debts can be discharged. As a result, creditors have a right to at least a share of any money given to them from the bankruptcy estate. The priority that the law gives to a creditor’s claim determines whether or not that creditor will be compensated.
The ability to distribute money to creditors belongs to the bankruptcy trustee, a court agent in charge of overseeing a bankruptcy case.
What Establishes a Claim’s Priority?
The priority of a claim is determined under bankruptcy law. The highest priority in bankruptcy is given to secured debts. Secured loans, like a car loan or a mortgage, are obligations with associated collateral. According to this logic, if a loan has collateral as security, the value of the collateral can be utilized to at least partially satisfy the obligation.
When a debtor uses collateral to get a loan from a creditor, that creditor is either reimbursed in accordance with the terms of the loan contract or is given permission to recoup the collateral through foreclosure (in the case of a house loan) or repossession (in the case of an auto loan).
Therefore, compared to other unsecured creditors, a secured creditor is less susceptible to the loss of repayment.
A lien or security interest on the property of a debtor is not removed by bankruptcy. Only the debtor’s obligation to pay the debt is removed. If the debt is not repaid, the lien is still in place, and the creditor may still foreclose or seize the property. Therefore, if a person declares bankruptcy and wants to maintain the assets used as collateral for a loan, they must keep paying the lender until the obligation is settled.
If the bankruptcy trustee sells the property during a Chapter 7 bankruptcy, the trustee must first pay the secured obligation in full before paying any other creditors. A debtor who files for Chapter 13 bankruptcy and wishes to maintain secured property can make the required monthly payments and settle any arrears over the course of a three- to five-year repayment plan.
The least important debts are those that are unsecured. Credit card debt, utility bills, and other similar debts are instances of unsecured debts since they are not secured by collateral. If the debtor files for bankruptcy, creditors with unsecured debts run the risk of receiving little to no payment.
Some debts are so important that they can never be forgiven and even survive bankruptcy, such as student loans and child support obligations. This indicates that even after declaring bankruptcy, the debtor is still liable to repay these loans in full.
An attorney who specializes in bankruptcy law should be able to assist a creditor in determining the sort of debt that is at issue in bankruptcy and the best course of action for obtaining payment through the bankruptcy procedure.
Unsecured debt can be divided into two groups:
- Priority unsecured claims: If funds are available, this claim will be paid before nonpriority unsecured claims are paid. These debts cannot be erased in bankruptcy;
- Priority unsecured claims include bills for alimony, child support, some taxes, and liabilities for injuries or fatalities brought on by drunk driving: The debtor is still required to pay these even after filing for Chapter 7 bankruptcy;
Except for school loans, most of these debts can be erased in bankruptcy under the category of “nonpriority unsecured claims.” Credit card debt, hospital expenses, and personal loans are examples of nonpriority unsecured claims. All priority debts must be satisfied before paying these nonpriority unsecured obligations with bankruptcy funds.
What Do I, as a Creditor, Do When I Get a Bankruptcy Notice?
When a creditor gets a bankruptcy notice, they must stop all collection activities immediately. This includes phone calls, billing actions, and legal actions pertaining to the creditor’s debt. After that, the creditor must submit a lawsuit to the bankruptcy court. In order to protect their interests in a bankruptcy procedure, creditors need to move swiftly because the filing deadlines are frequently short and tightly enforced.
An official evidence of claim form must be used to file claims, according to a notice that the bankruptcy court will send out at the beginning of the procedure. The trustee evaluates the claims after the claim filing date has passed and decides whether or not each creditor is entitled to any payment.
The ability to object to the debtor’s plan for their repayment of debts and other connected things is one of the rights creditors have in bankruptcy. A creditor has the right to object to a debtor’s request for a discharge of their obligation. For instance, a creditor may have grounds to assert that a debtor engaged in some form of fraud.
Additionally, secured creditors are also granted privileges. A secured creditor is in a far better position than an unsecured creditor during bankruptcy. For instance, a lien gives the secured creditor the right to the revenues from the sale of any assets used as collateral for the claim up to the claim’s full value.
For instance, a trustee might sell real estate that belongs to the debtor and is worth $200,000. The secured creditor, or mortgage lender, may only be entitled to get $75,000 from the debtor. The secured lender must be fully paid off before the trustee can distribute the remaining monies to other creditors as required by law. The trustee will divide the remaining $125,000 to the other creditors in accordance with bankruptcy priority after paying down the $75,000 mortgage.
Because of the lien rights, a secured creditor may approach the court for relief if it thinks it is losing money as a result of the trustee holding property during the bankruptcy. The trustee (or debtor) will probably be forced to either make payments to offset any potential losses or release the property if the judge grants the desired relief. With some restrictions, the secured creditor is also entitled to the interest on the loan as stated in the contract.
Do I Need a Lawyer to Get My Debt Paid Off?
A competent credit lawyer can advise you of the various legal options available to you to reduce your obligation and improve your chances of recovering the debt. A lawyer can be essential to obtaining a judgment against the debtor if you decide to take your case to court.