What is Debtor and Creditor Law?
Debtor/Creditor refers to a broad category of law dealing with people or entities who owe money to someone (called debtors) and the people or entities to whom money is owed (called creditors). The average individual owes many debts over the course of a lifetime, such as car and home loans, credit card accounts, accounts for medical or dental services, personal loans, rent, utilities, and child or spousal support. Generally speaking, the fact that a person or business owes another person or business money is not necessarily problematic; debts are part and parcel of modern life. However, when those debts are not paid, various aspects of debtor/creditor law may be implicated.
What Happens When Debts Go Unpaid?
An unpaid debt can have significant consequences to the individual or business debtor. Creditors can and generally will report delinquencies to credit reporting agencies, which makes it difficult to obtain future credit on favorable terms. Secured creditors, such as mortgage lenders and holders of car loans, may use non-judicial state law methods to foreclose on and retake possession of the collateral (i.e. the home or car). Some creditors may sue the debtor and obtain a judgment against the debtor for the amount owed (plus, in some cases, attorney fees and court costs). Creditors who have obtained a judgment against a debtor may be able to garnish the debtor’s wages and/or the debtor’s bank accounts. In some cases, a creditor with a judgment can obtain an order empowering the Sheriff to seize certain personal property owned by the debtor, sell it, and tender the sales proceeds to the judgment creditor. While the specific consequences vary according to the situation, one constant is that unpaid debts can seriously affect individuals and businesses.
What Effect Does Bankruptcy Have On Debt?
Bankruptcy law is complex and very fact-specific. Generally speaking, bankruptcy is a legal means of permanently eliminating debt. In many cases, an individual debtor can eliminate—or “discharge”—all of his or her debt. However, some types of debt, most commonly tax debt and student loans, are not dischargeable in bankruptcy. Depending on the type of debt, the assets of the debtor, and the debtor’s income, bankruptcy may involve repaying some portion of the debt, or the debtor may be able to cancel the debt without repaying any of it.
The two most common types of bankruptcy are Chapter 7 bankruptcies and Chapter 13 bankruptcies. A Chapter 7 bankruptcy is what most people are thinking of when they think of bankruptcy; it is intended to “wipe out” most unsecured debt and provide a fresh start. A Chapter 13 bankruptcy involves discharge of some debt, consolidation of other debt, and a court-approved repayment plan over a three to five year period.
One immediate effect of filing a bankruptcy is the automatic stay. Once a bankruptcy is filed, creditors must cease all collection activity and face severe penalties if they violate the automatic stay. Some creditors—generally secured creditors—may be able to obtain “relief from stay,” which is essentially court permission to pursue remedies such as foreclosure or repossession.
Depending on the type of bankruptcy, the nature of the debt, and the debtor’s assets, some creditors may be able to assert a claim in bankruptcy court and ultimately receive some portion of the debt owed. In many cases, however, unsecured creditors do not receive any money and the debt is simply cancelled.
In Oregon, debtors who file a bankruptcy can retain certain specified property notwithstanding the bankruptcy. These reserves are called “exemptions.” Oregon’s homestead exemption currently allows single debtors to exempt $40,000.00 in equity in their personal residence, and married debtors to exempt $50,000.00. An individual can likewise exempt $3,000.00 equity in a vehicle. If the debtor owns property that exceeds the exemption amount, the bankruptcy trustee can and generally will seize the property, sell it, and use all proceeds above the exemption amount to pay creditors. There are many more exemptions that may apply to a given situation.
Authored by Anna S. McCormack, Partner
Warren Allen LLP
DISCLAIMER: These materials have been prepared by Anna S. McCormack and Warren Allen LLP for informational purposes only. Every situation is different, and this general information may or may not apply to your situation. Transmission of this information is not intended to and does not create an attorney-client relationship. Readers should not rely on this information as legal advice, and should consult an attorney for personalized legal advice.
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