The Benefits of Filing Bankruptcy

People dealing with financial problems are undoubtedly in a tough spot. Whether it is due to divorce, health crises or job losses, the stress of debt (especially the specter of losing one's home or car) can be debilitating. Ironically, many people do not consider filing bankruptcy out of fear having to forfeit their personal property, being labeled a deadbeat, and having irreparable damage to their credit reports. Couple this fear with the myriad advertisements courting debtors to try debt resolution programs, and it is no wonder so many people deplete their retirement accounts, sell off personal property and live with emotional turmoil before finally seeking bankruptcy protection.

Fortunately, it does not have to be that way. This article will explain the benefits of filing for bankruptcy protection and explain how debtors can live life after receiving a discharge.

The Automatic Stay

Once a bankruptcy petition is filed, all collection actions must cease. This is because of the automatic stay, and it is arguably the biggest benefit available to bankruptcy debtors. The stay is an automatic injunction that prohibits phone calls, ceases lawsuits, stops repossession actions and halts foreclosure sales. This can be invaluable to people who are about to lose property or have been bombarded with collection calls. Also, the peace of mind that comes with not having to deal with creditors cannot be understated.

The automatic stay was intended to be the first step debtors could use in creating a fresh financial start, and essentially allows them to buy time to make arrangements to dispose non-exempt property. However, if a creditor continues collection actions or repossesses property while the stay is in effect, a debtor can file a lawsuit to recover actual damages (and in some cases, punitive damages) from the offending creditor.

Eliminating Debt

The purpose of filing bankruptcy is to obtain a discharge; the elimination of the legal obligation to pay a particular debt. A bankruptcy discharge eliminates most unsecured debt such as credit card debt, medical bills, personal loans and utility bills. As such, it is an important debt elimination tool since many people cannot rid themselves of this type of debt because of the additional fees, interest charges and penalties that are continually applied.

In unique circumstances, bankruptcy can be used eliminate tax debt as well. If you are at risk of losing a car, home, or other property secured by a loan, a bankruptcy can be used to establish a plan to catch up on past due payments and reduce the overall debt encumbered through the property.

Debtors usually choose between Chapter 7, known as liquidation or "straight" bankruptcy, and Chapter 13, called "wage earner's" bankruptcy.

In Chapter 7 bankruptcy cases, all non-exempt property is collected and sold to pay outstanding bills. Chapter 7 debtors usually do not have non-exempt property, so they keep their personal property after debts are discharged.

In Chapter 13 bankruptcy, all debts are combined and restructured into one affordable monthly payment based on the debtor's disposable income. Chapter 13 debtors may keep their personal property (such as a home, a car with significant value, or other valuable, non-exempt property) while catching up on past due debts.

Life After Bankruptcy

It is no secret that a bankruptcy can seriously affect your credit score. After filing their petition, most debtors experience as much as a 150 point drop to their credit score. While that may seem harsh, most people seeking bankruptcy protection have poor scores to begin with; so going from a 520 to a 350 is not such a calamity. Nevertheless, a bankruptcy discharge is considered a financial reboot, which means starting over again with a "new" credit history. This means that bankruptcy debtors can rehabilitate their credit scores by paying bills on time, using secured credit cards and not creating new debt. Using these practices, most debtors achieve strong credit scores within two years.

Indeed, a bankruptcy remains on a consumer's record for seven years, but it is not viewed as the same impediment in the wake of the 2008 financial crisis. Because so many people were affected through no fault of their own (and had no choice but to file bankruptcy) more lenders are looking at individual circumstances before extending credit. Essentially, borrowers who filed bankruptcy due to extended unemployment do not have the same risk factors as those who had reckless spending habits.

Ultimately, bankruptcy is a personal decision and should not be entered into without understanding all of the benefits and potential pitfalls. An experienced bankruptcy attorney can evaluate your situation, advise you of your options, and give you a sense of what to expect during the process.