What Happens in Bankruptcy If Your Debt Is Sold to Another Company?

By Seamus Flaherty

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.

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.

Get a free, confidential bankruptcy evaluation. Learn More

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.

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.

Discharge Violations

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.

Get a free, confidential bankruptcy evaluation. Learn More
Can a Creditor Sell to a Third Party If It Is Included in a Bankruptcy?

References

Related articles

What Happens to an Unsecured Loan After Chapter 13 Has Been Dismissed?

When you file for bankruptcy protection under Chapter 13, you are asking a federal court for protection from your creditors. The court issues an automatic stay, meaning your creditors must stop all collection efforts and lawsuits against you. A trustee then draws up a repayment plan, which schedules monthly payments that will repay a portion of your unsecured debts. If you fail to meet the payments, the court may dismiss the case — and there will be important consequences for those unsecured debts.

Can Creditors Attempt to Get Money After a Discharge?

When you file a petition for bankruptcy, you are asking a federal court for protection from creditors and time to work out your financial difficulties. In a Chapter 7 case, the court authorizes a trustee to seize your assets and sell them in order to repay creditors. In a Chapter 13, the trustee sets up a repayment plan, taking into consideration your assets as well as your income. Unless the case is dismissed, both kinds of bankruptcy conclude with a cancellation of debts you owe to some — but not all — of your creditors.

Does Bankruptcy Supercede a 1099C?

Most individual debtors file for Chapter 7 or Chapter 13 when they go bankrupt. The processes are very dissimilar, but the outcome is much the same. In Chapter 7, the trustee liquidates or sells your assets and pays down as much of your debt as possible with the proceeds. With Chapter 13, you pay down as much of your debt as possible with your disposable income each month. In either case, debts left unpaid are discharged. The discharge of the cancelled debt reported on form 1099-C can be tricky, and it depends a lot on timing.

Related articles

Can an Item Be Added to a Bankruptcy That Has Been Discharged?

Filing for bankruptcy means putting your financial life under a microscope. You must account for every dime you've ...

What Does It Mean if a Bankruptcy Is Lifted?

When an individual debtor files for Chapter 7 or Chapter 13 bankruptcy, creditors must immediately stop their ...

Difference Between Bankruptcy Closing & Dismissal

When your bankruptcy case comes to an end, it is said to have closed, but how it closes could have a significant impact ...

Can I Call a Creditor to Work Out a Deal While in Bankruptcy?

Generally, after you file for bankruptcy, the automatic stay prevents your creditors from contacting you directly. ...

Browse by category