How a Bankruptcy Stops Your Creditors
The purpose of a consumer bankruptcy is to give you a fresh start by eliminating certain debts, modifying others and enabling you to retain most if not all of your assets. A prime benefit of a bankruptcy is to stop your creditors from harassing you or beginning or following through on any collection activities.
Chapter 7 Filing
A Chapter 7 bankruptcy filing is one method that businesses and individuals can use, if they qualify, to get a fresh start or to dissolve their business while minimizing their personal losses. Once you file your petition, an automatic stay goes into immediate effect, meaning that all civil actions relating to you must cease.
For example, once you file, you can advise any creditor who contacts you that you have filed for bankruptcy protection. The creditor will ask for the chapter you filed under, the case number and if it as a creditor has been named. Once that information is given, the creditor may no longer contact you. Also, if a collection suit has been filed, the court where the case has been filed should be so advised about the bankruptcy, as well as the attorneys for the creditor, so that there is no further court action.
If post-judgment activities have commenced such as wage garnishment or a bank levy, it must also stop as well and any funds seized returned.
In the case of secured creditors, the creditor may contact the debtor to inquire about the collateral used to secure the debt and if the debtor wishes to reaffirm the debt, pay off the market value of the property or return it. In some cases, the creditor may agree to modify the terms of the debt. If real estate is involved, the creditor, or lender, may obtain a court order lifting the automatic stay so that it can proceed with foreclosure proceedings if that action was being contemplated or had already begun.
Chapter 13 Filing
A Chapter 13 filing is a reorganization or wage earner’s plan and can be used by individuals or unincorporated businesses. This filing enables individuals or businesses with a regular income to create a court-approved repayment plan over a period of 36 or 60 months. Not all creditors are paid 100% of the debt owed them under this filing.
The automatic stay also applies in a Chapter 13 filing so that creditors must cease any further contact and any court or collection activity. Like a Chapter 7, secured creditors may appear at 341(a) meeting (first meeting of creditors) and at a confirmation hearing to object to the proposed plan.
If your home is in foreclosure or it is threatened, the lender is bound by the automatic stay to not proceed any further. Also, you can keep your home so long as you are able to make the monthly mortgage payments as well as the arrearages over the life of the approved plan.