Lending institutions, such as banks and credit card companies, often sell delinquent debts to collection agencies in a process known as an assignment of claims. When you file a petition for bankruptcy, you are entitled to protection from your creditors collecting on your debts. Although the ability of your creditors to assign your debts is unaffected by your filing a petition for bankruptcy, any new holder of the debt is also prohibited from seeking payments during your bankruptcy or after your debts are discharged at the end of your bankruptcy case.
Consumer bankruptcy is divided into two categories: Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, your nonexempt assets are liquidated and paid to your creditors to repay your debts. Whereas, under Chapter 13 bankruptcy, you are placed on a three to five year repayment plan. When you file for either types of bankruptcy, you are granted immediate protection from all collection activities of your creditors under an automatic stay. At the conclusion of your bankruptcy case, most unpaid debts -- other than student loans, certain taxes, delinquent child support payments and other select debts -- are discharged and your creditors are not permitted to make further attempts to collect the debt from you.
Read More: What Happens After Bankruptcy Discharge?
When a debt collection agency buys your debt from the original creditor, or another collection agency, it obtains all the rights to repayment the original creditor held. Therefore, if your mortgage is sold to another lender, the new lender has the right to proceed against you for the loan and foreclose on the property as a secured debt. In the context of bankruptcy, the new creditor is able to recover any funds the original creditor would've been entitled to receive from the bankruptcy court; thus, the new creditor is treated as if it were the original owner of the debt.
After your bankruptcy case is initiated, any creditors you listed in your petition are notified of your filing for bankruptcy and advised of their right to file a claim for payment. Upon review of these claims, you may discover names of creditors that you do not recognize. They may be creditors who bought your debt through an assignment from the original creditor, either before or during your bankruptcy proceedings. If a creditor with an assigned claim seeks compensation through the bankruptcy proceeding, it may be required to submit documented evidence from the original creditor proving it bought the debt and the debt is valid.
After you obtain your bankruptcy discharge, your creditors are not permitted to seek payments from you for the original debt or any penalties, interest or attorney's fees incurred by the creditor as a result of your delinquent payments and bankruptcy. Any attempts by your creditors to recover debts after they are discharged is a violation of your bankruptcy rights and you are permitted to file a lawsuit to recover damages for creditor harassment.
Just as debt collection companies assume all the rights of the original creditor when they purchase an assigned claim, they also incur the same responsibilities the original creditor had as well. Therefore, if a bill collector with an assigned debt contacts you about a debt that has been discharged in bankruptcy, you or your attorney can inform the collector of the discharged debt and pursue any legal action to prevent further harassment.
- United States Bankruptcy Court, Middle District of Tennessee: What Is the Difference Between Chapters 7, 11 & 13?
- Attorney Andy Miofsky: Assignment of Claim
- Law Offices of Keith D. Collier: Creditor Harassment
- Jackson White: What Is a Discharge Violation
- Bankruptcy Law Network: Objecting to Credit Card Claims in Bankruptcy
Kevin Owen has been a professional writer since 2005. He served as an editor for the American Bar Association's "Administrative Law Review." Owen is an employment litigator in the Washington D.C. metropolitan area and practices before various state and federal trial and appellate courts. He earned his Juris Doctor from American University.