What Happens to Money Owed in Bankruptcy?

Dear Dave,

Our financial situation is pretty good now, and my husband and I feel it is time to start giving something back. There are several organizations we’re interested in helping, but how can we know if they’re legitimate and will use our money wisely?


Dear Laura,

I really appreciate your giving spirit, but the truth is you can never be 100% certain about this kind of thing. About the best you can do is put in some serious time researching and digging beneath the surface of various organizations to find some that are a comfortable fit for you.

My wife and I give the majority of our donations to Christian ministries. It’s not unusual for us to take a tour of the place to see what kind of feel we get while we’re there. If they’re secretive or not forthcoming with what we consider to be basic information about how they operate, or if we see signs of opulence or super-luxury, you can bet we’ll be asking lots of questions.

Talk to the leaders and administrators about what they plan to do with the money from your donation. You have a right to know this. I mean, if they’re going to give the money to hurricane victims, you want the victims to get the money, right?

People who work for a charitable organization need to make a decent living just like everyone else. But if they’re ultra-rich, it could be a sign that they’re not being responsible with their donations. Take a look at their administrative costs - what percentage of donations goes directly to the cause - and anything else you feel would help you make the right decision.

Giving is like anything else. It takes time and work to do it responsibly and with excellence!


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?


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.


* For more financial help please visit daveramsey.com.