Third-Party Collections in Bankruptcy: 4 Key Roles Explained
Third-party collection companies can help creditors in a bankruptcy scenario in several ways, although their primary role is significantly limited once a bankruptcy is filed. Here are some key points:
Pre-Bankruptcy Collection Efforts
- Efficient Recovery: Before a debtor files for bankruptcy, collection agencies can use their specialized tools and expertise to try to recover debts efficiently. This includes using advanced telephone dialer technology, template letter generation, and trained staff to contact debtors. 1
- Compliance Expertise: Collection agencies are well-versed in consumer protection laws and regulations, such as the Fair Debt Collection Practices Act (FDCPA), which helps ensure that collection efforts are compliant and minimize legal risks for creditors. 14
Post-Bankruptcy Notifications
- Notification to New Creditors: If a debt is sold to a new creditor after a bankruptcy filing, it is crucial that the new creditor is notified about the bankruptcy case. This ensures that the debt is included in the bankruptcy proceedings and can be discharged accordingly. 5
Bankruptcy Process Expertise
- Navigating Bankruptcy Proceedings: Some collection firms, especially those with legal expertise, can represent creditors in bankruptcy court. This includes attending creditors' meetings, filing motions, and adversary proceedings to protect creditors' interests. 2
- Automatic Stay: Collection agencies must be aware of the automatic stay that goes into effect upon a bankruptcy filing. This stay prohibits most collection activities, and violating it can result in sanctions. Knowledgeable collection firms can advise creditors on how to proceed legally. 36
Post-Discharge Compliance
- Preventing Illegal Collection: After a debt is discharged in bankruptcy, collection agencies must not attempt to collect on those debts. This is a critical aspect of compliance that protects both the creditor and the collection agency from legal repercussions. 36