The debtor creditor relation in case of a bankruptcy program

Bankruptcy is the ultimate debt discharge program.  In bankruptcy, a debtor receives a discharge on all or most of his or her debts. At the same time, bankruptcy also helps the creditor in getting back at least some of the money. Without the bankruptcy proceeding, chances of recovering money remain less.

Even if a creditor threatens or sues a debtor, if a debtor chooses to avoid making the payments, legal collection mechanisms are insufficient.  In reality, the debtor creditor relation does not change with bankruptcy.

Bankruptcy protects both

Bankruptcy protects both the debtor and the creditor (even the authentic collection agencies) or the lender, to whom the debtor owe the debts. Debtors can owe money to three forms of creditors.

One is the creditor who may have put lien against the debtor’s property. The proceeds from the sale of this property can be used to satisfy the lien before the money can be used to make payments to all of the other creditors. However, the payment will depend completely on the bankruptcy decree.

The second type of creditor can enjoy the priority interest which priority emerges on the basis of the statutory law. In case a creditor owns a priority debt, it will have to be paid first after you (as the debtor) are going to file insolvency. That means, this debt will have to paid even before any of the other debts, under your name.

The third type of creditor is the one who does not even have a lien on the property, or you owe a debt to the creditor which has a statutory priority. However, it is not only the creditors who may receive the money due. The money will also be used to pay down the mortgage and all of the other forms of debts.

The creditors can take help of the statutory judicial processes after you file bankruptcy, in order to get back the money. In case you are going to file personal bankruptcy, the creditor can get back the money either through liquidation of your assets or through a re-organization plan.

If a debtor files for Chapter 7 bankruptcy, assets will be liquidated by the bankruptcy trustee, to pay down the creditors. On the other hand if a debtor files for Chapter 13 bankruptcy, the debtor will be required to pay the creditors through a re-organization plan. In case of business bankruptcy too, the situation remains the same. Based on the financial status of the business, the business will have to pay down the debts.

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