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5 Debt Collection Bankruptcy Misconceptions


There are some common misconceptions about what bank creditors can do to collect and how bankruptcy influences their decisions. Robust collection and asset recovery software with bankruptcy tracking helps financial institutions manage debt efficiently and correctly.

Here is a look at some debt collection myths surrounding bankruptcy.

1. Credit is unavailable for seven years: Not true. There is life after bankruptcy such as increasing credits score as quickly as possible, obtaining the right kind of bank loans. In general, Chapter 7 bankruptcies remain on a credit report for up to 10 years and completed Chapter 13 bankruptcies remain for up to seven years.

2. Automatically becoming debt-free: The two most common bankruptcy methods among consumers are Chapter 7 and Chapter 13. In a Chapter 13 bankruptcy, the restructured debt rolls into a repayment plan for three to five years. The repayment period may or may not satisfy all debts, but any remaining unsecured debt is discharged once it is over.

A Chapter 7 bankruptcy eliminates most debts, but there are exceptions, such as student loans, child support, alimony and some taxes. Credit card bills and other debts acquired within 90 days of filing for bankruptcy may not face elimination if the court determines the purchaser did not intend to repay.

3. Debt collectors cannot take stuff or garnish wages: A common threat by creditors and collection agencies even though the company has not filed suit against the debtor. Apart from child support, alimony, tax debt and student loan debt, a creditor must file suit against a person and obtain a judgment before that creditor can garnish a person’s pay. The only way creditors cannot file suit and ultimately garnish a person’s pay is if the creditor agrees in writing to accept a certain monthly or weekly payment and the person is making the payments as agreed. Debt collectors cannot take just take stuff back.

According to experts, once someone files for bankruptcy, an automatic stay applies to the case, which means creditors automatically must stop any contact with that person. Once a debt is included in a bankruptcy, the debt collector cannot try to collect the debt. However, according to the Consumer Financial Protection Bureau, lenders may in some cases, have the right to repossess collateral that was not paid for, such as a car, after bankruptcy.

4. Both husband and wife’s credit gets hurt: Credit scores are based on each person’s individual payment history. Thus, one spouse filing bankruptcy does not affect the other spouse’s credit score. Except if there is a co-signed debt in which both parties owe and one of them files a bankruptcy case and stops making payments on that debt. Then the failure to timely pay the debt does affect the non-filing spouse’s credit score. If spouses have debts they want to discharge, which they are both liable for, experts such they should file together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who did not file.

5. Losing everything: This is a misconception that prevents some that should file for bankruptcy from doing do. While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as the house, car, money in qualified retirement plans, household goods and clothing. As long as a person is able to catch up any payments and pay the secured loans, such as a car loan or house mortgage, then that person can keep their home and/or car even though he or she filed a Chapter 7 bankruptcy. Under chapter 13, the debtor can keep the home and/or auto even if behind on loans prior to filing provided the person keeps up the insurance on the home or car and makes the reorganized payments.

The IBS Collection and Asset Recovery Manager: CARM-Pro™ and CARM-Web™ tracks all stages and debt issues including past due and delinquencies, charged-off debts, bankruptcies, foreclosures, repossessions, and OREOs.