How Bankruptcy Affects Creditors

••• gavel image by Cora Reed from Fotolia.com

Bankruptcy may have a lasting effect on debtors, but creditors feel the impact as well. When consumers file for bankruptcy, creditors are much less likely to be paid. Those that are paid may not receive the total amount originally owed.

Facts

Creditors must adhere to the ruling of the bankruptcy court, whether or not they agree with the outcome.

Types

Secured creditors are creditors who hold a lien on a piece of property and are paid first when a debtor’s assets are liquidated in a Chapter 7 bankruptcy. Unsecured creditors, however, do not have a lien and often only receive payment should the debtor file for Chapter 13 bankruptcy.

Features

If an individual files for Chapter 13 bankruptcy, a creditor can expect to be repaid via a repayment plan. The balance of the debt, the interest rate or any additional fees may be lowered by the court.

Considerations

A creditor must cease attempting to collect from the debtor once it receives notice of the bankruptcy. In order to receive payment for the debt, the creditor must file a claim with the bankruptcy court.

Warning

If a creditor can prove that the debt it was owed was incurred by fraud or that the debtor lied on his initial application, the debt may not be discharged through bankruptcy.

References

About the Author

Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.

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