What Does Bankruptcy Do?

BankruptcyThere are primarily two benefits to bankruptcy: the automatic stay and the discharge order.  The automatic stay protects the debtor from collection of debt.  This includes telephone calls from creditors, collection letters, filing or continuing a lawsuit, garnishment of wages and bank accounts, seizure of property, exercising control of the debtor’s property, attaching liens against the debtor’s assets, and several other powers.  Basically, the automatic stay stops most types of collection activity against the debtor or his assets.  Bankruptcy does not stop criminal prosecution or collection of criminal fines and restitution.

The discharge order is the court order signed at the end of the bankruptcy case that eliminates the debtor’s liability for debt.  Keep in mind that the debt itself is not gone.  The creditor can still collect the debt from third parties who are also liable for the debt.  However, the bankruptcy debtor is permanently shielded from liability for the debt.  Some debts are not dischargeable in bankruptcy.  These include domestic support obligations like child support, alimony and spousal maintenance, income taxes, student loans, criminal fines and restitution, judgments for fraud, and judgments resulting from lawsuits against the debtor for injuries incurred while the debtor was driving drunk.  Most other types of debts are discharged, making bankruptcy a very powerful tool for eliminating debt.

Bankruptcy also provides debtors a way to protect secured property from repossession or foreclosure and a tool for reorganizing debt and curing missed payments to secured and priority creditors.  Debtors in Chapter 13 bankruptcy cases file a reorganization plan with the court.  These plans provide repayment to some or all of the creditors listed in the plan.  Debtors can use Chapter 13 plans to get caught up on missed house and car payments.  These claims can also sometimes be repaid at a lower rate than under the terms of the original contract.  Once the plan is completed, debtors in Chapter 13 cases receive a discharge or their remaining debt, except for the types of debt that are excepted from discharge.  Chapter 13 bankruptcy is a great tool for protecting property and reorganizing debt.