How Bankruptcy Is a Solution to Debt Problems

Bankruptcy is considered to be the last resort or ultimate solution to most debt problems. If you have excessive credit card debt or other bills such as medical debts, utilities, foreclosures, tax debts, domestic relations proceeding, contingency lawsuits, professional malpractice debts, etc., you could wipe all of them out by declaring bankruptcy. However making the decision of filing bankruptcy is not an easy task for most people as it involves a lot of careful financial pre-planning, legal advice and future consequences.The US Bankruptcy Court advises people to take the following precautions when filing for bankruptcy. The rules surrounding bankruptcy filings are very technical, and a misstep may affect a debtor’s rights and thus your eligibility for filing bankruptcy. For instance, a debtor’s case for filing bankruptcy may be dismissed for failing to submit a required document such as a credit counselling certificate, revenue and expenses report, SIN card, etc.i) Bankruptcy is a long term decision and has lots of consequences in the future. It is therefore advised to hire a competent bankruptcy lawyer or attorney who has many years of experience and 100% success rate.ii) Watch out for companies advertising that they can help you file for bankruptcy for cheaper than a bankruptcy attorney can; most of the times, these companies are not really out to help you but just to scam you off your money. These companies by law, are not permitted to help clients file for bankruptcy, they can only help you fill out the bankruptcy forms. A bankruptcy attorney on the other hand has the knowledge and expertise to give you legal advice, answer all of your questions and assist you through all legal court proceedings as well as set you up for credit counselling services from a qualified credit counsellor.One of the most powerful features of filing for bankruptcy is that it stops debt collectors from calling you, harassing or threatening you to pay outstanding debts. Once you file for bankruptcy, all debt collection activity must go through the bankruptcy court and creditors cannot take any further action against you. Upon filing for bankruptcy, something called the “automatic stay” will go in to effect. This automatic stay prohibits creditors and collection agencies from contacting you or taking any action against you, except for certain secured debts (discussed below). Let’s go over some of the debts that can be discharged through your bankruptcy and for which debt collectors cannot take any action against you.TIP: You do not need bankruptcy to stop your creditors from calling you or threatening or harassing you. You can instead write a Stop Contacting Me letter to your debt collectors and under the Fair Debt Collection Practices Act (FDCPA), your creditors will legally not be allowed to contact you for debt collection calls. Instead of them threatening you on the phone, you could threaten them to refer their phone call to the police if they do not stop calling you.i) Credit card debt, medical bills or attorney feesAll debt collection activity relating to credit card debts, medical bills or attorney fees must stop once you file for bankruptcy. Creditors may not file a lawsuit against you and even if they do, they will not be able to proceed in court because you have the automatic stay (see above). Creditors may also NOT record liens against your property, forcefully seize your property (which makes their debt collection threats meaningless), or report your debts to a credit bureau. Also, any incorrect information they spread about your bankruptcy filing is a violation of the automatic stay and is illegal in the eyes of the law.ii) Public BenefitsBankruptcy protects you from government agencies cutting or terminating your public benefits such as Medicaid, Social Security Income or any welfare benefits you are receiving. The only time they can terminate your public services is if you naturally become ineligible for them.iii) Criminal ProceedingsCollection of criminal fines, debts or penalties including fines for criminal proceedings cannot be stayed from bankruptcy. If you have criminal proceedings, you will still have to go through them with your bankruptcy filing pending.iv) Home ForeclosureHome foreclosure proceedings can be initially stayed when you file for bankruptcy, however a builder or your mortgage bank can ask the judge to lift the stay and proceed with the home foreclosure; thus you should NOT count on bankruptcy to terminate your home foreclosure proceeding. This means homes and mortgages taken out on homes are not subject to bankruptcy protection. Also, the automatic stay does not apply if you filed another bankruptcy within the last two years and the court in that proceeding allowed the lender to proceed with the foreclosure process because of a determination that you filed bankruptcy as a way to improperly transfer your wealth or interests, hinder or defraud creditors or a scheme of multiple bankruptcy filings. In summary, you cannot prevent home foreclosure by filing a series of bankruptcies.v) EvictionsAn automatic bankruptcy stay cannot stop an eviction if the landlord already had a judgment allowing him to evict you from his property before the bankruptcy was filed. Also, the landlord may proceed with eviction proceedings against the tenant if he can prove that the tenants’ say in the property poses a danger such as illegal drug use, chemical grow ops, etc.vi) UtilitiesUtility companies providing you with gas, water, electricity, heating oil or telephone service may not discontinue service as a result of you filing for bankruptcy. However, they have the right to shut off your service 20 days after you file for bankruptcy if you do not give them a deposit or other means of assuring future payments of bills.vii) Income TaxesAn automatic stay stops the Internal Revenue Service (IRS) from issuing a lien on your taxes or seizing your property or income. However, the IRS can still demand the following tax files from you:* File a tax return
* Conduct a tax audit
* Issue a tax deficiency notice
* Seize your income tax refund to pay a prior year’s tax debt.