When you file for bankruptcy, you ask a federal court to protect you from collection actions and lawsuits by your creditors. If the court accepts your petition, it will grant an automatic stay, which stops all collection action while the bankruptcy is in progress. Creditors must file claims with the court; if the court accepts the claim, then a court-appointed trustee will pay a portion of the debts you owe out of your assets. During this process, your creditors keep their right to assign your debt to a collection agency.
Creditors that no longer wish to spend money and time on collecting a debt may assign that debt to a third party, which in most cases is a collection agency. The creditor and collection agency sign an agreement, in which they set down terms of the assignment. The agreement allows the collection agency to continue with collection actions on behalf of the creditor. The agency either buys the debt outright or earns a percentage of any amounts collected.
The bankruptcy court's automatic stay prevents any collection actions against the debtor who has filed the bankruptcy petition. Neither the original creditor nor the collection agency to whom the debt has been assigned has the right to send letters, make phone calls or make any contact with the debtor. Instead, bankruptcy law sets out a procedure for creditors to document a claim for repayment out of the bankruptcy estate: the debtor's assets that are available for liquidation by the trustee.
Motion to Lift Stay
The court notifies all creditors listed by the debtor on the bankruptcy petition of the automatic stay. All creditors, including collection agencies, must file a Proof of Claim notice with the bankruptcy court; the law also requires creditors to notify the debtor of any assignment. The creditors have the right to file a Motion to Lift Automatic Stay and ask the court's permission to resume collection efforts against the debtor. Creditors commonly do this when the debt is secured by property, and for which the debtor has fallen seriously behind on payments. In special circumstances, unsecured creditors, such as child-support agencies, may also move to lift the stay.
Application of Stay
Third-party collection agencies that have negotiated the assignment of a debt also fall under provisions of the automatic stay. The stay applies to any and all creditors, public and private. 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.
If the petitioner fails to include a debt in the original bankruptcy petition, then a creditor or collection agency has the right to pursue repayment. The creditor, in this case, can file an amended schedule of outstanding debts in an attempt to extend the stay to the new creditor. If he fails to do so, or if the court denies the amended schedule, then the law does not allow discharge of the debt. It remains collectible during and after the bankruptcy case.
If the debt had a co-signer, then the collection agency can pursue repayment, even if the court grants an automatic stay for the other debtor. This is true whether or not the court granted a discharge of the debt at the conclusion of the bankruptcy case. If the debtor successfully carries out a repayment plan through a Chapter 13 bankruptcy, however, the debt is fully discharged for the debtor and with respect to any and all co-signers.