When a borrower decides to declare bankruptcy, does that mean that the creditors get nothing? Bankruptcy is a legal way to eliminate debt, but what does that mean for the companies, organizations and individuals who loaned that person money in the first place?
To a large degree, it depends on the type of bankruptcy that is used. For instance, under Chapter 7 bankruptcy, the borrower may have to liquidate some of their assets. The money from this liquidation then goes to the creditors.
Now, the liquidation will not cover the entire amount of debt. The issue is that the borrower has no income and can pay back nothing at all. Creditors have to split up the smaller amount of money that they can get, but they do lose money on this deal.
With Chapter 13, the goal is to organize the debt in a way that makes it affordable for the borrower. They get to use a payment plan. It gives them years — most often, anywhere from three to five — to make those payments.
What this means is that the creditors may get their money eventually, as long as the borrower makes the payments. This plan is for those with a steady income. The creditor may not get the money as quickly as they originally thought that they would, but they do get paid in the end.
With any type of debt consolidation or bankruptcy plan, it is absolutely crucial for all parties involved to know what legal rights they have, how the filing changes their obligations and what steps they need to take.