Debtor-creditor law governs the interactions and relationships between people who borrow money and the people who lend money. However, when a person files a bankruptcy case, the Bankruptcy Code governs that relationship. Creditors cannot “opt-out” of a bankruptcy case. The roles of debtors and creditors in a bankruptcy case are very different.
Learn More About Debtors and Creditors in Bankruptcy
How do we define debtors and creditors?
What Is a Debtor?
A debtor is someone who borrows money from another party. In a bankruptcy action, a debtor is the person filing for bankruptcy relief. The debtor seeks a bankruptcy discharge. A discharge eliminates the debtor’s legal liability for a debt.
What Is a Creditor?
A creditor is a party that lends money or extends credit. In a bankruptcy case, there are three types of creditors:
Secured creditors have a lien on collateral. The collateral secures the debt. If the debtor does not pay the debt or stops making the agreed-upon payments, the creditor can repossess the collateral.
When the collateral is real estate, the creditor forecloses the mortgage. The home or real property is sold at a foreclosure sale to satisfy the debt. When the collateral is a vehicle or personal property, the creditor can repossess the property to satisfy the debt.
If the sale of the collateral does not pay the loan in full, the creditor can seek a deficiency judgment. The deficiency judgment is the amount of money the debtor owes after applying the sale proceeds to the account. The creditor can take legal action to collect the deficiency judgment, such as requesting a wage garnishment order and/or seizing personal property and financial accounts to satisfy the judgment.
Priority creditors receive payment in a bankruptcy case before unsecured creditors. In a Chapter 13 case, priority creditors must receive payment in full through the Chapter 13 plan. Priority creditors do not have collateral. A statute gives the debts priority.
Examples of priority creditors include, but are not limited to:
- Most income tax debts
- Most debts owed to the government
- Chapter 13 trustee administrative fees
- Wages, salaries, and commissions owed to an employee
- Alimony, child support, and spousal support
- Personal injury claims related to DUI accidents
- Court fines
Priority debts are given higher standing because the legislature considers these debts more important than general unsecured debts. Priority debts matter to creditors because it means their debts are paid first in a bankruptcy case.
For debtors, ensuring some creditors receive payment could be important. For example, having back child support and alimony paid in full through a Chapter 13 plan means the debtor avoids family court sanctions.
Unsecured creditors do not have collateral to secure their debt. Therefore, they cannot take any legal action to collect their debt after a bankruptcy filing. Instead, they must wait to see if they might receive any money from the bankruptcy.
Examples of unsecured debts include, but are not limited to:
- Credit cards
- Personal loans
- Medical debts
- Some old income tax debts
- Most judgments
- Old rent/lease payments
In a no-asset Chapter 7 case, the unsecured creditors receive no money. The debts are discharged. Therefore, the debtor is not required to repay those debts. If the Chapter 7 trustee liquidates an asset, the unsecured creditors may receive some money, if any funds are available after paying priority debts in full.
You must qualify to file under Chapter 7. Use our free Chapter 7 calculator to estimate whether you meet the income qualifications for a Chapter 7 bankruptcy.
In Chapter 13 cases, unsecured creditors receive a percentage of their debts. The amount they receive is based on the debtor’s disposable income and other factors. Generally, the payment equals pennies on the dollar.
Our free Chapter 13 calculator can estimate how much your Chapter 13 plan payments may be based on your current financial situation.
What Can Creditors Do If I Do Not File Bankruptcy?
If you cannot pay a debt and do not file bankruptcy, your creditors may have multiple legal remedies. First, secured creditors may seize and sell the collateral for the loan.
Creditors may turn the account over to debt collectors, which can ruin your credit. A creditor could also file a debt collection lawsuit. If they obtain a judgment, they could garnish your wages.
Before a creditor begins legal action to collect a debt, call or text us at (833) 272-3631 or contact us online for a free case evaluation. Ascend works with you to explore debt relief options.
Bankruptcy could be the best alternative to get rid of debts you cannot afford to pay. However, you could have other options, including debt settlement, debt payoff planning, and debt management. We will help you find the most affordable way to get rid of the creditors you cannot pay.