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Dave Says: Where Does Debt Go When Filing Bankruptcy?

Dear Dave,

What happens to the money that is owed when someone files bankruptcy? Do creditors just have to write it off, or do other people pay the price through taxes or higher interest rates?

Grace

Dear Grace,

In most cases the creditor just loses the money. That’s one of the risks businesses face. Of course, any bankruptcy is also a seriously bad mark against the filer’s credit record.

Chapter 13 filings may be considered a little less severe than Chapter 7 because you’re showing an interest in retiring the debts. They often allow – if you have a regular income and limited debt – to keep some of the property you might otherwise lose. Also, some debt balances may be partially discharged, with the filer agreeing to make monthly payments to the trustee for distribution among remaining creditors.

A Chapter 7 bankruptcy is lots tougher on the one who files. It involves liquidating all assets that aren’t exempt. Some of the filer’s property may be sold by a court-appointed official – a trustee – or just turned over to creditors.

It’s really a lose-lose situation, Grace. The business loses money, and the filer suffers the emotional pain of participating in a shameful process.

—Dave

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