What Bankruptcy Means To Your Creditors

6 August 2021
 Categories: Law, Blog


Credit card issuers, medical debt collection agencies, auto loan lenders, and others all fall into the same category – creditors. If you are about to declare bankruptcy, though, you should know that not all creditors are considered equal. To find out why that matters and how it affects your bankruptcy, read on.

Paying Your Creditors

When you declare Chapter 7 bankruptcy, you are declaring that you cannot pay what you owe to your creditors. In an effort to try and pay the creditors, however, the bankruptcy rules allow the trustee to evaluate, inspect, and sometimes take ownership of a filer's property during bankruptcy. Many Chapter 7 filers have property that is protected by exemptions. That means almost no creditors are paid any money at all when the debtor files for chapter 7.

Priority Creditors

Just in case the filer does have enough assets to seize, a pecking order has been established and it goes something like this:

  • Bankruptcy administrative costs and the trustee's salary (they get a percentage plus a flat fee per case) are paid first.
  • Secured creditors can be awarded the property securing the loan. That means auto lenders can take the vehicle and mortgage holders can foreclose on the home. This happens only when the filer is behind on their payments and they have not tried to make payment arrangements. Speak with your bankruptcy lawyer about reaffirming those debts so you can keep that property.
  • Back child support payments hover near the bottom of the list.
  • Taxes owed to the IRS are next.
  • Last and therefore seldom paid are credit cards, personal loans, medical debts, and other debts.

Understanding Property Seizures

As mentioned above, most filers are not at risk of losing property. When property is seized, the filers are informed ahead of time and arrangements are made to take possession of the property. Losing property is not common but some filers will need to discuss this possibility with their lawyer. Exemptions are in place to partially protect some property like real estate, vehicles, heirloom jewelry, work tools and items, and more. However, if you own collectibles, artwork, more than one home, a boat, and several cars, you might be at risk of losing some property. It's vital that you know what to expect before you make the Chapter 7 decision. Some consumers may be better off filing for Chapter 13 than Chapter 7, so be sure you understand how each type affects your property and more.