The United States Bankruptcy Code provides relief to people who are overwhelmed with debt. The primary benefit is that, with certain exceptions, creditors are prevented from collecting their debts through the automatic stay and bankruptcy discharge.
The Automatic Stay
As soon as a bankruptcy case is filed, the automatic stay goes into effect. The automatic stay prevents a creditor from taking any action to collect on a debt. This means that creditors cannot send monthly statements or contact the person by letter or phone. Creditors cannot file lawsuits and if there is a pending lawsuit, nothing further can happen in the case. All account garnishments and wage attachments must end. In Pennsylvania, filing for bankruptcy enables a person to get their driver’s license back if it was suspended because of a civil judgment entered against the person for a motor vehicle accident. The automatic stay even prevents colleges from withholding a student’s transcript because tuition is owed.
Not all actions are stayed by the filing of the bankruptcy. The automatic stay does not prevent the filing or continuation of a criminal case. It also does not stay the filing of an action for domestic support, such as child or spousal support. There are certain limitations in the automatic stay for repeat bankruptcy filings within a year. In addition, a creditor can request the bankruptcy court to grant relief from the automatic stay to allow the creditor to continue its collection efforts. The automatic stay terminates at the end of the case so that if that debt is not discharged, collection efforts can resume.
The Bankruptcy Discharge
The ultimate goal in filing for bankruptcy is to obtain a discharge. A discharge is an order entered by the bankruptcy court which permanently prevents a creditor from attempting to collect on the personal liability of a debt. What this means is that a person is no longer personally obligated to pay the discharged debts.
Not all debts are dischargeable. Generally, taxes incurred within the four years prior to filing are non-dischargeable. Student loans are non-dischargeable unless it can be shown that having to repay the student loan after bankruptcy would impose an undue hardship on the person and their dependents. Even if a person may be entitled to a discharge of taxes or student loans, it is not automatic. A separate adversary action must be filed for the court to determine whether the debts are dischargeable.
Domestic support obligations and debts incurred through fraud are always non-dischargeable.
In addition, certain debts that are non-dischargeable in chapter 7 are dischargeable in chapter 13. One such type of debt is an obligation owed to a former spouse that was incurred during a divorce proceeding.
While a discharge eliminates an individual’s personal liability on a debt, it does not eliminate the security interest that a secured creditor has in the property that serves as collateral for the loan. Therefore, if a person stops paying on a mortgage or vehicle loan, the creditor can still foreclose on the real estate or repossess the vehicle. However, the discharge would prevent the creditor from pursuing a person for any deficiency that is owed after the collateral is liquidated.
If you are struggling to pay your bills, contact Schimizzi Law to schedule a free initial bankruptcy consultation.