When one person or entity (a bank, etc.) furnishes services, money, or goods to another person or entity, a debtor-creditor relationship is created. The providing party is the “creditor” and the receiving party is the “debtor.” Such relationships are usually based upon the debtor’s promise to repay the creditor at a later time, often through a payment plan (such as a monthly bill). If the debtor fails to make the agreed-upon payment by the deadline, the creditor may begin a debt collection process to seek repayment. For example, credit card companies often have collections staff to contact customers who fall behind on their bills.
If the creditor cannot get repaid through such efforts, they may hire a debt collection agency or an attorney to begin more formal collection efforts. These third party “debt collectors” must follow strict federal and state laws when communicating with debtors. It is important for creditors to know their responsibilities to avoid penalties and for debtors to know their rights to dispute invalid debts and avoid harassment.
If a creditor/debt collector and debtor cannot settle the debt, the creditor may resort to a lawsuit. A creditor may request a court grant them a “money judgment” for the amount the debtor owes. If the relationship was based upon goods, however, a creditor may request “replevin” for the goods to be returned. Depending upon the nature of the judgment it receives, a creditor has several options to use until the debt is paid in full. For example, they may contact the debtor’s employer to garnish wages from each paycheck or the debtor’s bank to levy funds from his or her accounts. However, a creditor cannot touch certain kinds and amounts of a debtor’s property which federal or state law protects as “exempt” from collection.
Bankruptcy is one option for persons who have debts that they cannot pay. Many people pursue bankruptcy when their creditors begin to repossess, garnish, or otherwise take possession of the debtor’s property. In the United States, bankruptcy is under the jurisdiction of the federal court and is intended to give people with excess debt and insufficient assets a chance to “discharge” the debt and get a fresh start.
Bankruptcy requires the debtor to disclose all debt and all assets on their bankruptcy petition and to permit the bankruptcy trustee, who was appointed by the bankruptcy court, to manage the debt and assets. Most people can keep most of their property, but every situation is different. Most consumers will seek relief in a Chapter 7 bankruptcy, called a liquidation bankruptcy, or a Chapter 13 bankruptcy, which is when the debtor repays all or some of their debts over time through a Chapter 13 bankruptcy trustee, after calculations are made as to how much disposable income is available to repay creditors.
After bankruptcy, most debtors have little or no unsecured debt, but may still have loans or debt for which some of their property was used as collateral, such as a mortgage on a house. However, it is important for debtors to understand that not all debts can be discharged through bankruptcy. For example, debtors typically cannot get out of their child support, spousal support (also known as spousal maintenance or alimony), or student loan obligations through bankruptcy. Those debts typically remain intact after bankruptcy.