Many people today are suffering under a mountain of debt and expenses while their income has not kept pace. In many instances, people experience job loss, corporate downsizing, reduced work hours, divorce, serious illness or accidents that cause an interruption of their income. Bill collectors are very unsympathetic to many of these life-changing events. All they want is “their money.”
Federal bankruptcy law provides a legal and respectable way to gain control over your life and your finances again. The law provides a mechanism to stop your debt collectors from filing a lawsuit against you, garnishing your wages or bank accounts, repossessing your vehicle or foreclosing on your home. The law allows you to restructure your finances in a manner that provides relief from a lot of your debts as well as providing a framework for paying for the debts you want to keep.
One of the most important features of a bankruptcy is something called the “automatic stay.” This is the legal requirement that ALL creditors must stay away from you and stop ALL debt collection activity once an individual has filed for bankruptcy and received an official case number. The automatic stay stops all foreclosures, lawsuits, garnishments or other legal actions taken by a creditor in their efforts to collect on a past due debt. It also stops all creditors from taking any new action to collect on a debt while in a bankruptcy. Harassing phone calls, rude debt collectors and nasty mail or emails should stop as soon as a creditor receives notice that an individual has filed for bankruptcy. However, in the real world it may take a little time for the big corporations to make sure that the knowledge of a bankruptcy filing is properly communicated to the proper collection department or the proper subsidiary in charge of collections. It is a violation of Federal bankruptcy law for a creditor to continue to make collection attempts once they have received actual notice of a bankruptcy filing.
Most average Americans utilize either a Chapter 7 bankruptcy (see Overview) or a Chapter 13 bankruptcy (see Overview) to take back control over their financial lives. Overviews of each type of case are included in the following information. Because you owe debts, the law refers to you as a Debtor. The person or company that extended credit to you and to whom you owe the debt is referred to as a Creditor.
Understanding Your Debts
There are generally three kinds of debts involved in a bankruptcy:
a) Secured Debts – These are debts for which the repayment is secured by a lien on a physical piece of property called, “Collateral.” Some examples are: car loans, boat loans, 4-wheeler loans, real estate mortgages, bank loans secured by CD’s, bank accounts or other property. Generally, if you default on the repayment of this type of debt, the Creditor can repossess or foreclose on the collateral, sell the collateral at auction, apply the proceeds to the balance owed, and sue you for what is left owing, called “a deficiency.” If a Creditor obtains a judgment against you for the deficiency, then that Creditor can garnish (take money) from your paycheck or bank account. In some instances, the Creditor can force the Sheriff to sell some of your property to satisfy the judgment.
b) Priority (unsecured) Debts – These are generally unsecured debts that are considered by the law too important to just forgive so they must be paid in full. Some examples are: taxes and certain other debts owed to the federal or state government, and alimony, maintenance or child support payments. There are other types of priority debts but most average debtors will generally not encounter those.
c) General Unsecured Debts – These are the most common type of debts that most debtors experience. These debts are not tied to any specific collateral and are just general obligations to repay the debt owed. Some examples are credit card debts, medical bills, hospital bills, local merchant charge accounts, etc. As a general rule, unsecured debts are “discharged” after the completion of your bankruptcy. They simply “go away” and a Creditor is forbidden by law from ever trying to collect that debt.