Dealing with debt can be a heavy burden to bear, and it might feel as though you're going it alone with no safe options available. People facing debt often consider filing for bankruptcy as a last resort, but it can be a powerful tool with a range of advantages and protections for each situation. While these benefits can be limited in some cases, it's always wise to stay informed of exactly what bankruptcy protection can mean for you.
How Can Bankruptcy Protection Help You?
While legislation varies by state, there's no need to worry when it comes to filing for bankruptcy. Federal statutes are considered “the supreme law of the land,” so state judges are required by law to adhere to bankruptcy law. This means that you can file for bankruptcy in any state and be automatically protected.
While it is a legally sound path to take, the social stigma surrounding filing for bankruptcy is a common reason people don't avail themselves of this sometimes necessary option. For those who do, relief after filing can come in many forms. While there is no one-size-fits-all approach, just the space to breathe and formulate a solid plan can ease the burden of financial stress. Exactly how can filing for bankruptcy provide relief?
It Prevents Pestering Creditor Calls
The significant weight debt carries almost always involves the constant harassment of debtors by creditors demanding repayment. If you decide to file for bankruptcy, an Automatic Stay – a legally binding order – is put in place by the court that prevents creditors and debt collectors from contacting you. This includes contact by phone, mail, email, text, all forms of social media, etc. Consequences of violating the stay include fines for contempt of a court order, court costs, and legal fees.
While contact may be prohibited, and the potential consequences act as a deterrent for creditors tempted to get in touch, it's important to note that the debt hasn't automatically been cleared, meaning creditors can still legally collect support payments. Any person or company seeking repayment is notified of the Automatic Stay by the court and is warned of the consequences if they violate this order.
It Can Clear Credit Card Debt
There are two types of debt you should be aware of when considering filing for bankruptcy: secured and unsecured debt. If you have secured debt, it means you've made a purchase that you secured by collateral, essentially promising to return the property if you fail to make your payment. This property could be appliances, furniture, jewelry, etc. If you've purchased anything secured with collateral, like a mortgage, the debt can be eliminated, but you'll be forced to part with your purchase.
Unsecured debt, in contrast, covers a range of payments that aren't backed by underlying assets, so no such promise of return has been made. This could include credit cards, utility bills, medical costs, personal loans, etc. Note that student loans aren't considered unsecured debt. Bankruptcy can clear this unsecured debt, giving you some breathing room as you address your finances. In terms of credit card debt, clearance of this debt can provide a clean slate and the opportunity to increase your credit score as you rebuild your credit.
It Puts a (Temporary) Stop on Evictions, Foreclosures, and Repossessions
Filing for Chapter 13 bankruptcy will give you the opportunity to get up to date on past payments, putting a halt on the foreclosure or repossession of your home. To avail of this option, you have to prove that you have sufficient income to repay back payments and stay up to date on future payments.
On the other hand, if you file for Chapter 7 and find yourself unable to repay your debt, the stay acts only as a pause on the foreclosure or repossession, and you won't be able to reclaim your home or assets. The automatic stay applies to cases that are still pending, so if your landlord has already submitted an official eviction judgment, or your home has already been repossessed, filing for bankruptcy unfortunately can't reverse those decisions.
Chapters of Bankruptcy and Protections They Provide
In the United States, six chapters of bankruptcy are available, depending on your unique situation. Each chapter brings with it its own criteria for eligibility, along with providing its own form of protection for the filer. Review each below to see which, if any, applies to your situation and how you could be protected after filing.
This is the most filed bankruptcy type and is regarded as the most basic. For individuals, Chapter 7 liquidates the individual's property, distributing it to creditors. Filers are permitted to keep “exempt property,” i.e., vehicles, necessary household goods, furnishings, etc. For businesses who choose to file for Chapter 7, a trustee is appointed to take the reins of the business, operating as normal for a pre-determined period of time.
This chapter provides protection for municipalities, i.e., cities, towns, counties, etc. Upon filing, the Automatic Stay provides the municipality the time to create a repayment plan to adjust their debts.
Unlike Chapter 7, this option allows businesses to operate under the control of the debtor. No trustee is appointed, so the debtor doesn't have to resort to selling off assets to clear their debt. Terms on debts, such as values of payments and interest rates, are discussed to avoid the need for asset liquidation. This is the best form of protection for anyone hoping to make their way out of debt with their business and trade intact.
This type of bankruptcy file applies to farms and fisheries, providing those eligible the opportunity to maintain ownership of their assets as they cooperate with a trustee and creditors to design payment programs. Their business is protected while they reorganize their debt, repaying this debt over a period of three to five years.
This chapter is commonly filed for because, as mentioned, people can avoid foreclosure or repossession of their homes, an appealing feature for many considering a bankruptcy filing. Sometimes called the “wage-earner plan,” it provides protection and relief for those unable to make immediate payments. A lack of income is not the primary issue for those filing for Chapter 13.
This chapter applies to people facing financial struggles involving foreign debt. Prior to the introduction of this chapter to the U.S. bankruptcy code, resolving debt issues was difficult and time-consuming. Today, Chapter 15 bankruptcy filers are protected through enhanced cooperation between U.S. and foreign bankruptcy courts.
Get Help Navigating Bankruptcy
Bankruptcy protection doesn't just cover the clearance of debt; it provides options and opportunities for those who find themselves in financial woes. Predatory lending exists, with some creditors more than eager to prey on the vulnerable. Filing for bankruptcy is often the only way out of debt, offering a financially responsible path to a fresh start. Bankruptcy legislation was created to provide these options, and the law should be utilized and availed of whenever necessary and without the attached social stigma.
If you find yourself struggling with debt and you're considering filing for bankruptcy, call Thomas Kerns McKnight, LLP, today to book a consultation with an expert attorney experienced in bankruptcy legislation.