The Pros and Cons of Filing for Bankruptcy for Creditors Collecting Judgments
As a creditor, you might find yourself facing the question of how to collect on a judgment, especially when the debtor has filed for bankruptcy. Bankruptcy often carries a negative connotation, but understanding its effects is crucial for creditors looking to recover debts. Bankruptcy can provide an opportunity for debtors to get a fresh start, but it also presents a set of challenges that creditors must navigate carefully.
The Benefits and Opportunities for Creditors:
For creditors, filing for bankruptcy may provide some positive aspects, particularly when dealing with Chapter 7 or Chapter 13 bankruptcies. Here’s why:
- Chapter 7 Bankruptcy: If the debtor files for Chapter 7, creditors may have the opportunity to recover some of the debt through the sale of non-exempt assets. While debtors may lose non-exempt property in a Chapter 7 case, creditors can work with the trustee to recover assets.
- Chapter 13 Bankruptcy: Under Chapter 13, creditors have the potential to be paid over a period of time, as the debtor works to reorganize their finances. This plan can extend the payment period, potentially leading to a more consistent flow of payments.
As a creditor, if you are looking to collect a judgment, understanding which type of bankruptcy the debtor has filed for is crucial. Bankruptcy law might seem daunting, but you can work through it with an experienced bankruptcy attorney specializing in collections.
Collections Through Garnishments:
One of the most effective tools available for creditors trying to collect a judgment is writs of garnishment. After obtaining a judgment, creditors can use garnishments to collect money directly from a debtor’s bank accounts or wages. However, understanding the process is critical:
- Writ of Garnishment: This legal tool allows creditors to seize the debtor’s funds from their bank accounts or wages. A properly executed garnishment can be an effective way to recover funds owed after a judgment is awarded.
- Justice Court Mechanics: Understanding how the Justice Court system works in Texas is essential for navigating garnishments. Whether it’s Harris County, Galveston, or elsewhere in Texas, each county may have slightly different procedures for how garnishments are issued and enforced.
By partnering with an attorney who understands both bankruptcy and collection laws, you can ensure that your efforts to collect a debt are properly executed, and the chances of recovery are maximized.
The Challenges and Drawbacks:
While there are certainly advantages to collecting through bankruptcy proceedings, there are also significant challenges that creditors must be prepared for:
- Filing Fees: One of the initial hurdles for debtors is the cost of filing for bankruptcy. For creditors, the costs of continuing the collection process through garnishment may add up, and additional legal fees can be incurred. Understanding the financial landscape of the debtor before proceeding with garnishments is key.
- Potential Loss of Assets in Chapter 7: If the debtor files for Chapter 7, all their non-exempt property will be liquidated to pay creditors. While this may seem advantageous for creditors, it’s important to remember that certain property may be exempt under Texas law, reducing the pool of assets available for recovery.
- Impact on Credit: Bankruptcy will negatively affect the debtor’s credit score, but it doesn’t automatically mean that the creditor will recover all or any of their debt. After a bankruptcy discharge, it may be difficult to collect anything further, especially in Chapter 13, where payments are spread out over several years.
What Does This Mean for Collecting Judgments?
If you’ve already obtained a judgment but the debtor files for bankruptcy, it doesn’t mean you’ve lost your chance to collect. Instead, it means you’ll need to adjust your strategy.
For creditors pursuing judgment collections, writs of garnishment can be a powerful tool, especially after a debtor has filed for bankruptcy. However, understanding the debtor’s bankruptcy status and the process is key to successful recovery. If you’re uncertain about how to proceed, it’s important to speak with an attorney who understands both collections and bankruptcy law.
As someone with over 25 years of experience as a debtor’s attorney and having filed over 4,000 Chapter 7 and 13 cases, I am very familiar with Texas exemptions and the complexities of collecting from debtors. Whether you’re dealing with bank garnishments, wage garnishments, or other methods, I can guide you through the process to ensure the best possible outcome in collecting your judgment.
