The Power and Limits of Bankruptcy: What Bankruptcy Can and Can’t Do

BankruptcyFiling for bankruptcy is such a drastic measure that it is important to think about it carefully. Most people resort to this legal move, believing that it will be the panacea for their financial problems.

Yes, bankruptcy has the power to shield you from worse problems, save money, and give you peace of mind, but it also has its limitations. Law firms everywhere – from Little Rock to NYC and back echo the sentiments of financially troubled people, advocating the right legal information about bankruptcy. Before you make a move, make sure you know what bankruptcy can and can’t do for you.

What Bankruptcy Can Do

Restrain creditors from harassment and collection activities. The moment you declare bankruptcy, the principle ‘automatic stay’ stops creditors from pursuing you and collecting assets. The court sends an official letter to collectors, instructing them to stop such activities.

Get rid of credit card and other unsecured debts. Chapter 7 bankruptcy allows you to discharge credit card debts. The law sees such debts as unsecured claims, that is, a creditor does not have a lien against your assets. Take note, though, that there are a few exceptions to this, especially if there is a case of fraud involved.

Stop a mortgage foreclosure. Declaring Chapter 13 bankruptcy stops a foreclosure, forcing the lending company to agree to a certain arrangement where you can settle missed payments over time, while keeping up with regular monthly payments. In this set-up, you have to show that you have enough money in the future to support such a repayment plan.

What Bankruptcy Cannot Do

Eliminate certain debts. Under Chapter 7 or 13 bankruptcy, these debts are not dischargeable:

  • Debts not listed in the bankruptcy papers
  • Debts incurred from personal injury or death incidents as a result of intoxicated driving
  • Debts incurred from penalties imposed for law violations, including traffic tickets and criminal restitution

End child and spousal support obligations. You are still accountable for these debts even if you file bankruptcy. You have to repay these in full if you use Chapter 13.

Discharge student loans (but with certain conditions). You will no longer be liable for student loans only if you can prove that paying these debts will cause “undue hardship.” You have to show that you do not have the capacity to pay the loans and that it is unlikely that you can sustain payments in the future.

The best way to determine the right legal action for financial problems is to consult an attorney. They will provide you with legal information that will be helpful in making an informed decision.

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