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How are collection agency debts handled in bankruptcy?

Rules on discharged debts apply to collection agencies and lenders

Debts often go through various stages before they reach U.S. Bankruptcy Court. The result may be confusion for those seeking court relief about how different debts will be handled once a bankruptcy case is under way.

In the simplest terms, a creditor may be the original source that lent money or credit to the debtor, or the debt may be passed on to another entity. That usually happens when a bill is at least six months behind in payments and the original creditor hires a collection agency or sells the debt to a third party. These transfers of debt are pervasive, as collection agencies purchase past-due bills from credit card companies, medical offices, retailers and some utilities.

For debtors who have bills in varying degrees of delinquency, one of their biggest questions may be whether all those debts can be discharged at the end of the court action. If a debt is considered dischargeable when it was held by the original creditor, it remains that way when it changes hands.

"Whether a debt has been sent to collection or has been sold to a third party does not change the nature of the debt," according to Clagett Law Office in West Virginia. "If it was a dischargeable debt to begin with, it remains a dischargeable debt."

Same rules for lawsuits

The same reasoning applies if a creditor files a lawsuit to force payment of a debt. A discharge in bankruptcy court ends the case and prevents the creditors from pursuing their claims. In addition, no creditor can continue to report a debt as unpaid to credit bureaus once the discharge has been granted.

That doesn't necessarily stop some creditors from pursuing their claim illegally by contacting the debtor after the case concludes and alleging that the discharge doesn't apply to a third-party claim.

According to United States Courts, debtors may take legal action against a collector who pursues a debt after it has been discharged. They must file a motion in court to report the collection effort so the case regarding that particular debt will be reopened. When creditors are found to have violated a discharge order, the court typically finds them in contempt and issues a fine.

In addition, the Fair Debt Collection Practices Act prohibits unfair or deceptive practices to collect debts, including pursuing a debt that has been discharged in a bankruptcy.

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