People who file for bankruptcy almost always share one goal – the end of creditor harassment. Once you file for bankruptcy, it is illegal for creditors to contact you in an attempt to collect most debts. This wall of protection is known as the “automatic stay.” But what happens if a creditor turns around and sells your debt to another creditor after you file for bankruptcy? Are you still responsible for the debt? Do you have to start the whole process over with the new creditor? The answers to these questions, respectively, are yes and no – but there are some helpful points to keep in mind if this happens to you.
Sale of Debt
When a creditor is owed money, that debt is an asset that can be sold, or “assigned,” to another party just like any other asset. If a creditor believes it will not get repaid, or does not want to wait years to get paid over the course of a Chapter 13 plan, the creditor can sell the debt in order to receive an immediate, often lower, sum. Once this happens, the party buying the debt “stands in the shoes” of the original creditor and can attempt to collect only what the debtor owed the original creditor at the time of assignment.
Chapter 7 Vs. Chapter 13
While it is possible in theory for creditors to receive some payment when a person files for bankruptcy under Chapter 7, such payments are rare because of the limits on income and belongings affecting eligibility to file under Chapter 7. For this reason, a debt is usually sold only if the debtor files for bankruptcy under Chapter 13. In a Chapter 13 bankruptcy, sale of a debt is more important than in Chapter 7 because whoever owns the debt is eligible to receive payments under the Chapter 13 plan upon filing a proper claim. Under court rules, however, responsibility for notifying the court that one of the filer’s debts has been sold falls to either the original creditor or the party buying the debt.
Read More: Can One Spouse File for Chapter 13 & the Other for Chapter 7?
Effect on Your Bankruptcy
From your perspective, if you have filed for bankruptcy, the sale of a debt has very little effect – positive or negative. You still owe the debt. You just owe it to a new creditor, but that new creditor’s attempts to collect the debt are governed by the bankruptcy proceedings already underway, including the automatic stay.
A discharge is the court decree issued at the end of a bankruptcy stating that creditors may never again attempt to collect the debts included in the bankruptcy. Once it issues, it is unlawful for a creditor to sell the debts included in the bankruptcy. If you are contacted by a creditor who bought a discharged debt, you can forward a copy of your discharge to that creditor, which will normally end any further harassment. If the creditor continues to attempt to collect the debt, you should consider taking steps to have an action brought against the creditor in court.
Seamus Flaherty is a lawyer experienced in the areas of international trade, commercial litigation, foreclosure defense and bankruptcy. He has clerked for federal judges at the trial, appellate and administrative levels, and run a solo practice. Flaherty is licensed in New York, Florida and several federal jurisdictions.