What will happen to my debt, my monthly bills when I file Bankruptcy?
When you file a bankruptcy, a Court order automatically goes into effect that keeps your creditors from legally collecting from you (the automatic stay). Later, when you are granted a bankruptcy discharge, the creditor is forever barred from collecting this debt from you (or your spouse if you filed a joint bankruptcy case). It is important to note that debt still exists, it’s just that the creditor is prohibited from collecting from you due to the bankruptcy discharge.
If you had co-signors, they would still be liable for the debt presuming that they have not filed bankruptcy and received a discharge themselves. What typically happens is that the credit card company or whoever holds the claim or right to collect the debt, simply writes off the discharged debt as a business loss. Some of my clients mistakenly believe that the government steps in after the bankruptcy case is filed and pays the debt off, which is not the case. It is important to check your credit reports about six months after your discharge is granted to check to see that your former debts show as “included in bankruptcy” or “discharge in bankruptcy” or some other similar notation.
Rarely, a creditor will attempt to get around the law and will continue attempts to collect after the bankruptcy is filed. They can be sued or sanctioned for this prohibited conduct, but you need to prove they did it, as we need to show the attempt to collect was a willful violation of the bankruptcy discharge order. If they are calling you attempting to collect a discharged debt, give them your bankruptcy information such as date filed, chapter and case number. If they refuse to accept the information, tell them to call me, your lawyer. If they continue to harass you, gather as much information as possible such as the name and address of the company, their phone number, who you talked to and any relevant information they have regarding the debt. A particularly valuable piece of evidence would be an actual paper collection letter sent to you after the debt was discharged, however most creditors that ignore the law will never send you letters or anything on paper after you file, but they may make phone calls hoping that you will pay anyway.
Do I have to pay my bills during the Chapter 7 or 13?
No, not the debts you are seeking to discharge, as most of my clients receive their discharge, so paying on credit cards, medical bills, past due utility bills etc. is a waste of money. Don’t pay any bill (except a home or car note you wish to keep and your post-filing utilities such as DTE Energy, Consumers, Comcast, etc.) that you are trying to wipe out. Payment plans that you may have with non-dischargeable creditors such as student loans or IRS tax debts will temporarily stop during the pendency of your case, but will resume after the discharge is granted. Continue to pay alimony and child support obligations that you may have during the case.
If you are in a Chapter 13 reorganization case, you may be paying your entire mortgage through the plan (both regular monthly payment plus any arrearage). If this is the case, you will have no need to send in monthly mortgage payments directly to your mortgage company. Don’t pay any payment in a Chapter 13 unless it is the regular monthly mortgage payment or car payment, and your plan says that you are paying the creditor directly. Remember, when your case is filed, the automatic stay goes into effect, a stay is a federal Court order which means “stop” or “put on hold”. If you have a debt that is backed up with collateral such as a car loan or home financing (mortgage or home equity loan), any payments not made will continue to add up but the creditor cannot proceed against the collateral such as by repossession or foreclosure, until the stay is terminated.
Often, the creditor will file a motion to terminate the stay after the bankruptcy is filed. Bankruptcy stops your obligation to pay, but the creditor may still have a lien and rights in the property. Many of my clients will temporarily quit paying for secured property when they file as the automatic stay gives them a breathing spell to decide if they want to reaffirm, redeem, surrender (give back) or simply continue to make payments without formally reaffirming. I advise them to make up their mind within 30 days so as to not fall too far behind should they wish to keep the property. Mortgages are rarely reaffirmed as the mortgage services or bank seldom puts together the reaffirmation agreement but rather simply allows the debtor to continue to make their regular monthly mortgage payments. There are really no problems with this and it is generally favorable from the standpoint of a debtor as my client continues to retain the property (usually their primary residence) without being liable on the underlying promissory note. The lien (the mortgage) will survive the bankruptcy (i.e. you don’t get a free house after filing) however the lender will not foreclose, and in fact is prohibited from doing so, so long as the mortgage is kept current. Basically the only drawback to having no signed and filed reaffirmation agreement with the mortgage company is that they cannot report any account activity to your credit bureaus as this could be considered a violation of the bankruptcy discharge or an attempt to collect a debt.
Generally, the mortgage services will resume sending monthly statements to debtors who have expressed an interest in keeping their property with a notation somewhere on the statement that says “if you received a discharge in bankruptcy, this is for informational purposes only and is not an attempt to collect a debt” or a similar phrase. Many of my clients here in Michigan are members of a credit union. Credit unions are a little bit different than a traditional bank and rather than being referred to as customers, they are called “members” of the credit union. If you cause the credit union to incur a loss, such as by discharging a loan or other line of credit, you might have with them, you may lose your credit union privileges. This means that they may close your checking and savings accounts and even offset or keep the money that you have on deposit with them and apply it to any outstanding debt you owe.
My office will advise you to close and stop any direct deposits into a credit union checking or savings account if you intend to include them in your bankruptcy and seek a discharge of the debt owed to them. It is important to note that some credit unions may refuse to reaffirm a car or mortgage unless you also reaffirm their credit cards or other loans or accounts you have with them. They call this cross-collateralization of the accounts and is something I only see in cases with credit unions. Usually, however, my clients really like their relationship with their credit union and will want to keep and reaffirm all of their outstanding obligations with them so as to retain their credit privileges.
What if I keep getting bills after I am granted a Bankruptcy Discharge?
Sometimes, my clients report that they continue to get some bills or collection letters from creditors that were clearly listed on the bankruptcy schedules and were notified of the proceedings by the clerk of the court and were later notified that my clients had been granted a discharge. When my office files a petition for a client, the Bankruptcy Court sends out notices to the addresses that are on my client’s credit report as well as listing the addresses on any statements or collection letters our clients provided to us.
Nevertheless, every once in a while, a creditor or more commonly a collection agency claims to have never received these notices and continues to try to collect the debt. This is usually a simple fix as this is generally an oversight or clerical error by their department. My client or my office simply provides them a copy of the bankruptcy notice, they note it in their system and the problem is taken care of.
Sometimes, my clients have properly listed the original creditor however that account has been sold or transferred to a collection agency or collection attorney’s office. Again, we simply notify the parties about the bankruptcy and no harm, no foul. I advise all of my clients to make copies of the original bankruptcy hearing notice (Notice of Commencement of Bankruptcy), which my office as well as the court provides. If you later get a bill or other dunning letter from a creditor, send them a copy of the bill they sent you as well as a copy of the official notice. Some creditors will continue to send bills even if they receive notice. It may be that their computer can’t stop sending out the bills, or they may simply be ignoring the stay hoping that you will pay anyway.
If this becomes a problem, and you have proof that a creditor is doing this on purpose, contact my office, and we will investigate to see if this creditor is willfully violating an order of the bankruptcy court and is subject to sanctions and other remedies for their actions.
Who notifies the Creditors and bill collectors?
After the bankruptcy petition is filed, the bankruptcy court noticing center mails a notice to all the creditors listed on the case matrix within a few days. Some more common creditors such as Citibank or Capital One may have supplied their bankruptcy department’s email address to the court and will find out via email shortly after filing.
Bankruptcy law is complex.
As you can see, the filing of a bankruptcy petition and other paperwork can be a difficult process. Let Board Certified Specialist Walter Metzen help you get your financial life back on track. I am a consumer bankruptcy lawyer in Michigan, who has counseled thousands of clients through the bankruptcy process and helped them relieve the stress that debt can cause. I am available for free consultations and never charge unless I can help you and your family. Contact me online, call me today toll free at 1-888-4Walter (313-962-4656).