A Bankruptcy Filing Doesn’t Always End the Collections Process

Just because someone who owes you money files Bankruptcy, it doesn’t mean the that you’ll never receive any money and you should throw away your judgment.

Even in bankruptcy, there’s still a chance of monetary recovery. In addition to the benefits to the debtor (i.e. the discharge of debts), the secondary point of the bankruptcy process is to maximize return for creditors by organizing and selling the debtor’s non-exempt assets. But, to be candid, most creditors in bankruptcy only receive pennies on the dollar in the process.

Keep in mind, however, the success rate in Chapter 13 bankruptcy cases (where debtors repay a percentage of their debts over 3 to 5 years) can be as low as 20%, meaning that most of those cases end with a dismissal. A dismissal is good for a creditor, because there is no discharge of the debt. Instead, the full amount remains due and owing. Debts are eliminated only when debtors receive a “discharge.” That’s an important distinction to know.

Finally, remember that a bankruptcy discharge only discharges “debts”—not “lien” rights. So, if you’ve already obtained a judgment and recorded it as a lien, then your lien on the debtor’s property may survive the bankruptcy discharge. As a result, even though you can’t collect your debt, you can enforce your lien in the event of an attempted sale or refinance.

Of course, a bankruptcy filing invokes the automatic stay, which requires a cessation of all collective efforts. But, even though your collection may be stayed, that doesn’t mean that it’s the end of the line on your efforts.

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