Creditors often sell debt to other companies for administrative reasons or cost savings. Debt sales are more likely during Chapter 13 bankruptcies than Chapter 7 bankruptcies. If you are the debtor in a bankruptcy case, you don't have to do much if your original creditor sells your debt to another customer. Most of the administrative burden falls on the new creditor.
Chapter 13 Bankruptcy
If you file Chapter 13 bankruptcy, you have to make payments to creditors for as long as five years. Since that is a long time to wait to receive repayment, a creditor may sell its interest in your debt to another company for an up-front payment instead. Although the legal owner of your debt is different, you still owe the same amount of debt. Since your payments in a Chapter 13 plan are made to and distributed by the court, you don't have to change anything regarding your payments if your original creditor transfers your debt.
Proof of Claim
Federal rules of bankruptcy procedure dictate that creditors must file claims with the court to receive any distribution in a bankruptcy case. If your original creditor sells your debt to another company, it must notify the court in writing of the transfer. The new creditor must file a proof of claim with the court, according to Bankruptcy Rule 3001. As a debtor, you will be informed by the court of the new claim, and the court will provide you with all relevant information regarding the transfer. Although you don't legally have to take any action, you should take note of the new creditor's information for your records.
Once a creditor sells or transfers its rights in your bankruptcy, it cannot contact you in any manner regarding your debt. Unscrupulous creditors may try to convince you that you still owe the original debt, but this is against the law as outlined in the Fair Debt Collection Practices Act. While some debt collectors are known to abuse the law regarding collections, this is less likely if you have actually filed bankruptcy, since all transfers and collections are run through the bankruptcy court.
Chapter 7 Bankruptcy
Most Chapter 7 bankruptcy cases are "no-asset" cases, meaning nothing at all is paid to creditors. Since there usually isn't anything to collect, creditors are rarely able to sell off debt to other companies during an active Chapter 7 case. In the event a case is declared to be an asset case, claims are usually liquidated and paid relatively quickly to the original creditor. In the unlikely event that a creditor due an asset payout would sell a claim to another company, the rules of bankruptcy procedure guide the process just as in a Chapter 13 case.
- United States Courts: Chapter 7
- Cornell University Law School: Federal Rules of Bankruptcy Procedure, Rule 3001, Proof of Claim
- Cornell University Law School: Federal Rules of Bankruptcy Procedure, Rule 2002, Notices to Creditors
- United States Courts: Chapter 13
- Federal Trade Commission: Fair Debt Collection Practices Act
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