When you file for bankruptcy, you ask a federal court to protect you from collection actions and lawsuits by your creditors. Filing the bankruptcy petition stops all collection action while the bankruptcy is in progress. Creditors must file claims with the court in cases where there are assets to be sold or payments to be made. During this process, your creditors keep their right to assign your debt to third parties.
Assignment of Claims
Lenders often sell their loans to other lenders. Agreements for selling debt are called assignments, in which the original creditor assigns its right to collect the debt to another creditor. A lender may also assign the debt to a debt collection agency; the agency may either buy the debt outright or agree to collect it on behalf of the lender for a commission.
The Automatic Stay in Bankruptcy
The automatic stay prevents any collection actions against the debtor who has filed the bankruptcy petition. Neither the original creditor nor its assignees can send letters, make phone calls, send bills, foreclose, repossess or make any contact with the debtor unless they obtain a court order after notice and a hearing.
Assigning a debt to another party is not a violation of the automatic stay. Therefore, creditors are free to sell their debts during the bankruptcy case.
Claims in Bankruptcy
The court notifies all creditors that the bankruptcy has been filed and the automatic stay is in place. If the case is a Chapter 7 with assets or a Chapter 11, 12 or 13 case where payments are being made, the creditors must file claims in the case if they want to be paid.
Application of Stay to Assigned Debts
The stay applies to any and all creditors, public and private, including for debts that have been assigned. This includes creditors such as a distant relative who is claiming repayment of a small loan up to the Internal Revenue Service seeking millions in back taxes. It applies whether or not the debts are secured or unsecured, and whether or not the law allows discharge of the debt at the end of the bankruptcy.
Effect on Co-Signers
If the debt had a co-signer, then the collection agency can pursue repayment; the bankruptcy stay only applies to the person who filed bankruptcy unless the case is a Chapter 13 case and the debt is a consumer debt. In that case, the stay applies to the co-debtor as well, but the discharge will still only apply to the filing debtor. The creditor can still pursue the non-filing co-debtor once the stay is no longer in place.