Bankruptcy is a legal procedure which allows individuals, businesses, and even government entities to eliminate debt with the protection of the federal bankruptcy court. A bankruptcy case is filed under one of the chapter of title 11 of the United States Code, or more specifically, the U.S. Bankruptcy Code. For individuals, most bankruptcies fall under one of two categories or chapters: liquidation or reorganization. Because the effects of filing bankruptcy are long-lasting, it’s important to proceed with filing a bankruptcy with a large amount of thought and of course a bankruptcy attorney to assist you and protect your consumer rights. There are many advantages to filing bankruptcy, including automatic stays, debt discharge, lien stripping, cramdowns, and the ability to retain property.
Automatic Stay in Bankruptcy
When you file either type of bankruptcy, whether it be liquidation bankruptcy (Chapter 7) or reorganization/repayment bankruptcy (Chapter 13), you trigger an immediate “automatic stay”. The automatic stay in bankruptcy is an injunction that stops all debt collection activities, to include wage garnishment, foreclosures, repossessions, and utility shut-offs. The automatic stay is a huge advantage of filing bankruptcy as it goes into effect the moment your bankruptcy petition is filed. An automatic stay’s duration depends on which type of debts you place into the bankruptcy estate and which chapter of bankruptcy you file. Regardless, the automatic stay can be an excellent tactical move to protect property and give you the opportunity to reorganize or discharge your debt.
Discharge Your Debt
The number one advantage of filing bankruptcy, as well as, the overarching goal is to discharge, or legally eliminate, most or all of your unsecured debt. Unsecured debt includes general consumer debt, credit card debt, personal loans, and medical bills. By discharging your debt, you will be able to use your future income for things such as living expenses, repairs, replacement of damaged property, or continue mortgage or rent payments. The discharge also prohibits creditors from communicating with you about the debt over the phone, thought the mail, or in person.
A common type of lien stripping in bankruptcy involves the process of eliminating second or third mortgages (junior liens) on property that you own. Junior liens are considered “wholly unsecured” liens when the value of your home is no longer sufficient to secure the loan, which means that if you sold your home, the market value would be less than the first mortgage. Your second and third mortgage holders would not be paid in this type of scenario and thus can be treated in the same manner as other unsecured consumer debt.
A cramdown is a process of legally reducing the balance you owe on secured loans. Like lien stripping a cramdown is a massive advantage of filing bankruptcy as it can save you an abundance of cash over the long run, in addition to saving your property. A cramdown works by comparing the amount you owe on your loan to the actual market value of the collateral and if the market value is lower, reducing the amount you owe to match. There a few rules and restrictions on cramdowns with regards to how long ago you purchased the property and which type of bankruptcy you file. Make sure to consult your bankruptcy attorney about cramdowns if you own more than a piece of property is worth.
Retain Your Property
It’s been said that you don’t have to give up any property that you wish to keep during the course of a reorganization bankruptcy. Another massive advantage of filing bankruptcy is that debtors may be able to protect and keep most or all of their personal property, to include basic household goods and furnishings, 401(k) and retirement plans, homes, automobiles, jewelry, and tools used for your professional trade. Each state, as well as, the federal guidelines offer “exemptions” that allow you to safeguard certain types of personal and real property, up to a certain dollar value. How much property you get to keep hinges on which chapter of bankruptcy you file, how much property you own, and where you are filing bankruptcy (some states offer more exemptions than others).
Advantages of Filing Bankruptcy
As you can see, there are many different advantages of filing bankruptcy. Not all advantages will be applicable to everyone, and bankruptcy may not be the right answer for your particular situation. The best way to discover if bankruptcy is your best option in obtaining debt relief and becoming debt free is to meet with your local bankruptcy attorney. Filing bankruptcy is seen as a debt resolution alternative in many individual’s eyes, but by meeting with a Rocklin bankruptcy lawyer, you will be able to get out of debt much sooner and begin your road to financial security faster.