Public awareness of consumer bankruptcy has increased dramatically over the last twenty years. Ease of access to information on the internet, the explosion in attorney advertising, and widely publicized changes in national bankruptcy and collection laws, have kept the subject of bankruptcy in the consumer consciousness. The sheer number of bankruptcy filings in the United States each year has desensitized many individuals to the stigma once associated with “going bankrupt.” Still, for a lot of people bankruptcy remains something to avoid and to be ashamed of – regardless of their financial situation. But this notion that seeking bankruptcy relief is either immoral or an admission of personal weakness is contrary to the purpose of our bankruptcy laws. Our consumer bankruptcy system is designed to be a shield that protects individuals and their assets from the financial misfortunes that innocently arise in our day-to-day lives. In turn, that protection allows debtors to maintain sustainable standards of living and continue to be productive members of our society.
There are three fundamental protections provided in every bankruptcy case: the bankruptcy exemptions, the automatic stay, and the discharge. A bankruptcy estate is created whenever a bankruptcy case is filed. Essentially, it is comprised of all of the individual’s assets – even including contingent and unliquidated claims against third parties. In a chapter 7 case, the chapter 7 trustee’s job is to liquidate the property of the estate and pay the proceeds to the creditors. However, to ensure that debtors come out of bankruptcy with sufficient resources to move forward with their lives, the bankruptcy laws allow individuals to claim certain property as exempt from the bankruptcy estate. This exempt property is out of the reach of the trustee and creditors, alike. The vast majority of consumer chapter 7 cases are no-asset cases. A “no-asset” case means that there are no, non-exempt assets for the trustee to liquidate – in that case, the debtor retains all of his/her property in spite of filing for bankruptcy.
A bankruptcy estate is also created when a chapter 13 case is filed. Unlike a chapter 7 case, however, the chapter 13 trustee does not liquidate the property of the estate. Instead, chapter 13 provides individuals a way to restructure their debts, pay their debts at an affordable rate, and keep and use the property of the estate.
The second mechanism for protecting debtors in bankruptcy is the automatic stay. With some exceptions, the automatic stay is a temporary injunction that automatically goes into effect when a bankruptcy case is filed. The automatic stay prevents creditors from collecting from (a) the debtors, (b) their exempt property, or (c) property of the bankruptcy estate. It stops phone calls, lawsuits, repossessions, foreclosures, etc. Its purpose is to give debtors “breathing room’ while the bankruptcy case proceeds; protect the bankruptcy estate for either the debtor (in a chapter 13 case) or the trustee (in a chapter 7 case); and, to promote the debtor’s fresh start by preserving the exempt property for the debtor’s benefit after the bankruptcy case is concluded.
Finally, the ultimate goal in almost every consumer bankruptcy case is the bankruptcy discharge. The bankruptcy discharge is a permanent injunction imposed by the Bankruptcy Court which prevents creditors from collecting on any discharged debts from the debtors. The discharge relieves individuals from liability on their old debts while they strive to move forward and financially re-establish themselves.
Filing for bankruptcy is not the solution for everyone. But, if you are facing mounting pressure from your creditors, or just cannot seem to get ahead of your debts, you should consider the protections that are available to you under the bankruptcy laws. Do not be swayed by public misconceptions about the so-called evils of bankruptcy. Instead, seek frank and knowledgeable advice from an experienced bankruptcy attorney. Only then, when you have the information you need, can you make an informed decision about whether bankruptcy is a viable alternative for you.