Automatic and Immediate Protection from Your Creditors

How does bankruptcy stop garnishments, foreclosures, and repossessions?

 

Filing a bankruptcy case gets immediate protection for you, for your paycheck, for your home, and for all your possessions. This “automatic stay” provides this kind of protection for you and your property the moment either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case is filed. Virtually all efforts by all your creditors against you or anything you own comes to an immediate stop.

“Automatic Stay” = Immediate Stop

“Stay” is simply a legal word meaning “stop” or “freeze.”

“Automatic” means that this “stay” goes into effect immediately upon the filing of your bankruptcy petition. That filing itself, according to the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or take possession of collateral. Since the filing of your case itself imposes the stay, there is no delay or doubt about whether a judge will sign an order to impose the “stay” against your creditors.

Creditors Need to Be Informed, Sometimes Directly

Although the protection of the “automatic stay” is imposed instantaneous, practically speaking your creditors need to be informed about the filing of your case so that they are made aware that they must comply with it. If your creditors are all listed in your bankruptcy case documents, they should all get informed by the bankruptcy court within about a week or so after your case is filed. This doesn’t take any additional action by either you or your attorney (beyond making sure all of your creditors are listed in the schedule of creditors filed at the bankruptcy court). If you have no reason to expect any action against you by any of your creditors before that, just letting them all be informed by the court is usually all that’s needed.

However, if you are expecting some action by any of your creditors quicker than a week or so after filing the case, be sure to talk with your attorney about it. That way any such creditor can be directly informed by about your bankruptcy filing to stop whatever collection action it was contemplating. Make sure you and your attorney are clear which of you is informing that creditor and in what way.

Creditor Action Taken Unexpectedly

But what if a creditor has not yet been informed of your bankruptcy filing when it takes some action against you or your property in the days after your bankruptcy filing but before it finds out about it?

If this happens, the “automatic stay” is so powerful that in most circumstances such a creditor must undo whatever action it took against you after your bankruptcy was filed, even if this creditor honestly did not yet know about your filing. For example, if after your bankruptcy is filed a creditor files a lawsuit against you or gets a judgment on a lawsuit that it had filed earlier, the creditor must dismiss (throw out) its lawsuit or vacate (erase) the judgment.

 

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Why Can’t a Creditor Chase You After Your Bankruptcy?

What makes it illegal for your creditor to pursue a discharged debt? What penalties may get awarded to you if a creditor breaks the law?

 

Chasing a Discharged Debt is a Violation of Federal Law

The Bankruptcy Code makes it perfectly clear that for a creditor to try to collect on a debt after it is discharged under either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” is illegal. Section 524 of the Bankruptcy Code is about the legal effect of a discharge of debt. Subsection (a)(2) of that section says that a discharge of debts in a bankruptcy “operates as an injunction against” any acts to collect debts included in that bankruptcy case. Acts explicitly stated as illegal include:

the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.

In other words, the creditor can’t start or continue a lawsuit or any legal procedure against you, and can’t act in any other way to collect the debt.

What If a Creditor Violates This Injunction?

Nowhere in Section 524 of the Code does it say anything about what happens if a creditor violates the law by disregarding that injunction. The section does not clearly say what, if anything, the penalties are for a creditor caught doing so.

However, even though no penalties are specified in THAT section, there is a strong consensus among courts all over the country that bankruptcy courts can penalize creditors for violating the discharge injunction through another section of the Bankruptcy Code, Section 105, titled “Power of Court.” The idea is that the injunction against pursuing a discharged debt is a court order, and so a creditor violating it is in contempt of court. So the usual penalties for those who act in civil contempt of court apply.

Penalties Assessed Against Violating Creditors

These penalties for civil contempt can include “compensatory” damages and “punitive” damages.

Compensatory damages are intended to compensate you for harm you suffered because of the creditor’s violation of the injunction. These potentially include actual damages such as time lost from work or other financial losses, emotional distress caused by the illegal action against you, and attorney fees and costs you’ve incurred as a result.

Punitive damages are to punish the creditor for its illegal behavior. So the judge looks at how bad the creditor’s behavior was in determining whether punitive damages are appropriate and how much to award.

Conclusion

The vast majority of the time creditors in a bankruptcy case write the debts off their books and you never hear about those debts again. But even though it’s illegal for creditors to try to collect on a debt that’s been legally written off in bankruptcy, once in a while they do try. Some creditors don’t keep good records or simply aren’t all that serious about following the law.

So after you receive your bankruptcy discharge, if you hear from one of your old creditors trying to collect its debt contact your attorney right away.  This needs immediate attention. If the creditor’s behavior is particularly egregious, you and your attorney should discuss whether to strike back at the creditor for violating the law. There might possibly even be some money in it for you.

 

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Saving Your Home Through Chapter 7 and Chapter 13 in Three Scenarios

Here are 3 common scenarios. When is Chapter 7 “straight bankruptcy” enough, and when do you need Chapter 13 “adjustment of debts”? 

 

Assuming that your most important goal is saving your home, here’s how each kind of bankruptcy helps with that goal.

Scenario #1: Current on Your Home Mortgage(s), Behind on Other Debts

Chapter 7:  Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Stops those other debts from turning into judgments and liens against your home. May also allow you not to fall behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.

Chapter 13:  Same benefits as Chapter 7, plus often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to “strip” (permanently get rid of) a 2nd or 3rd mortgage, so that you would not have to make that monthly payment, and paying little or nothing on the balance during the case and then discharging any remaining balance at the successful completion of your case.  Is better at protecting assets than Chapter 7, if you either have more equity in your home than your homestead exemption allows or have any other asset(s) not protected by other property exemptions.

Scenario #2. Not Current on Home Mortgage(s) But Only a Few Payments Behind & No Pending Foreclosure

Chapter 7:  May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies and their servicers (the people you actually interact with) will agree to give you several months—generally up to a year—to catch up on your mortgage arrearage. Generally called a “forbearance agreement”—lender agrees to “forbear” from foreclosing as long as you make the agreed payments. Works only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if filing Chapter 7 will stop enough money going to other creditors so you will have enough monthly cash flow to pay off the mortgage arrearage quickly.

Chapter 13:  Even if only a few thousand dollars behind on your mortgage, you may not have enough extra money each month after filing a Chapter 7 case to catch up quickly on that mortgage arrearage.  Lenders seldom voluntarily give you more than about a year to catch up, but if you file a Chapter 13 case that forces them to accept a much longer period to do so—three to five years. That greatly reduces what you need to pay towards the arrears every month, often making it affordable.  

Scenario #3. Many Payments Behind on Your Mortgage(s):

Chapter 7:  Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, or at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, no possibility of “stripping”a 2nd or 3rd mortgage.

Chapter 13:  As stated above, gives you up to five years to pay off the mortgage arrearage, all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not enable you to reduce the first mortgage payment amount, although in some situations you may be able to “strip” your 2nd or 3rd mortgage.

 

CAUTION: these are just the very basic advantages and disadvantages. There are lots of other twists and turns which will likely apply to your unique scenario. Be sure to meet with an attorney for the best game plan for you to meet your goals. 

 

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Keeping a Vehicle with a Debt under Chapter 7 “Straight Bankruptcy”

If you owe a debt on a vehicle, Chapter 7 gives you a narrow choice: keep it and pay on the contract, or surrender it and owe nothing.

 

The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption

In a Chapter 7 case you have two people besides you who could be interested in your vehicle. The bankruptcy trustee could care about any equity you have in the vehicle (the value over the amount you owe on it), but only if that amount is more than what would be protected under the vehicle exemption. There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.

Surrendering a Vehicle to the Lender

You may not want to keep your vehicle because you simply cannot afford to keep making the payments or doing so is just not worthwhile considering your alternatives. Or you may be a couple payments behind, and filed your Chapter 7 case quickly to stop your vehicle from being repossessed, but now realize that hanging on to the vehicle is not feasible for you.

You likely know that if you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added). That deficiency balance is often much higher than you expect. The Chapter 7 bankruptcy will almost always write off that deficiency balance. Indeed, that is a common purpose for filing bankruptcy.

Keeping Your Vehicle

 If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case. You will almost for sure be required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. You have to sign that reaffirmation agreement and have it filed at the bankruptcy court within a short period of time—usually within 60 days after your bankruptcy hearing, meaning you have to be current usually a few weeks before that. Then you have to stay current if you want to keep the car, just as if you had not filed a bankruptcy. And also just as if you had not filed bankruptcy, if that vehicle later gets repossessed or surrendered, there is a good chance that you would owe a deficiency balance. So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.

The Lack of Other Alternative Usually

Almost always—especially with conventional, national vehicle loan creditors—you are stuck with the terms of your original loan contract if you want to keep your vehicle. You can’t reduce the balance of the loan, the interest rate, or the monthly payment. If you’re behind, almost always you must pay the arrearage and be current within a month or two. There can be exceptions, especially with local finance companies and such who would rather minimize their losses by being flexible. So be sure to ask your attorney whether your vehicle creditor has such as history. And if you do need more flexibility—if you must keep your vehicle, and owe more than it is worth, and you can’t afford the payments—ask about Chapter 13 as a possible better solution.

Conclusion

Usually “straight bankruptcy”—Chapter 7—is the best way to go if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it and are current or can get current within a month or two of your bankruptcy filing.

 

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Keeping All that You Own by Filing a Chapter 13 Case

How does a Chapter 13 “adjustment of debts” protect what you may otherwise lose in a Chapter 7 “straight bankruptcy”?

 

Chapter 13 is often an excellent way to keep possessions that are not “exempt”—which are worth too much or have too much equity so that their value exceeds the allowed exemption, or that simply don’t fit within any available exemption.

Options Other Than Chapter 13

If you want to protect possessions which are not exempt, you may have some choices besides Chapter 13.

You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need, such as equipment or inventory from a business that you’ve closed.  Surrendering an asset under Chapter 7 may also make sense if you have “priority” debts that you want and need to be paid—such as recent income taxes or back child support—which the Chapter 7 trustee would pay with the proceeds of sale of your surrendered asset(s), ahead of the other debts.

There are also asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures beyond the scope of this blog post.

Chapter 13 Non-Exempt Asset Protection

If you have an asset that is not protected by an exemption which you really need or simply want to keep, by filing under Chapter 13 you can keep that asset by paying over time for the privilege of keeping it.  Your attorney simply calculates your Chapter 13 plan so that your creditors receive as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee.

For example, if you own a free and clear vehicle worth $3,000 more than the applicable exemption, you would pay that amount into your plan (in addition to amounts being paid to secured creditors such as back payments on your mortgage). You would have 3 to 5 years—the usual span of a Chapter 13 case—throughout which time you’d be protected from your creditors. Your asset-protection payments are spread out over this length of time, making it relatively easy and predictable to pay.

This is in contrast to negotiating with a Chapter 7 trustee to pay to keep an asset, in which you would usually have less time to pay it and less predictability as to how much you’d have to pay.

Chapter 7 vs. Chapter 13 Asset Protection

Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset, and other factors.

First note that people with assets to protect have other reasons to be in a Chapter 13 case, and the asset protection feature is just one more benefit.

Furthermore, in some Chapter 13s you can retain your non-exempt assets without paying anything more to your creditors than if you did not have any assets to protect. If you owe recent income taxes and/or back support payments (or any other special “priority” debts which must be paid in full in a Chapter 13 case), you can use these debts to your advantage. Since in a Chapter 7 case such “priority” debts would be paid in full before other creditors would receive any proceeds of the sale of any surrendered assets, if the amount of such “priority” debts are more than the asset value you are seeking to protect, you may well only need to pay enough into your Chapter 13 case to pay off these “priority” debts.

This way you would get an immediate solution—your assets protected right away and the IRS or other “priority” debt creditor off your back. And you’d have a long-term solution, too—your assets would be protected throughout the Chapter 13 case, and the IRS and/or other “priority” creditor would get paid off. Once your case is completed, you would be debt-free. 

 

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Keeping All that You Own in Bankruptcy

Can you really keep everything you own if you file bankruptcy?

 

The Answer: Usually Yes.

1) Yes, usually you can keep those possessions that you own free and clear—meaning you don’t owe any money to a creditor which has a lien on those possessions. 

2) Yes, usually you can keep those possessions which you don’t own free and clear—meaning you owe money to a creditor which has a lien on them—IF you want to keep them, AND are willing and able to meet certain conditions.

In today’s blog post we’ll address the first part of the above answer. We’ll get to the second part in the near future.

Keep What You Own Because of Property Exemptions, and Possibly Because of Chapter 13

Most people who file bankruptcy can keep what they own for two reasons: 1) property exemptions and 2) Chapter 13 protections. In a nutshell, property exemptions designate what types and amounts of assets you can keep; if you have any type or amount of property that isn’t covered, Chapter 13 adds an additional layer of protection.

The Core Principle of Chapter 7 Bankruptcy

In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). BUT, for most people, all or most of their assets ARE protected, or “exempt.”

As a result, debtors in Chapter 7 generally get a discharge of their debts without having to give any of their assets, or only a select set of assets, to the trustee.

Property Exemptions Aren’t As Simple As May Seem

  • The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state ones, while in other states you are only permitted to use the state exemptions. When you have a choice, choosing which of the two exemption schemes is better for you is often not clear and you need an experienced attorney to help with this.
  • If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
  • Even once you know which set of exemptions apply to you, whether all of your assets are covered by an exemption and protected is often not clear. The exemption statues in many instances were written long ago using outdated language, often interpreted by the courts as to their current meaning. Plus the local trustees often have unwritten rules about how they interpret the exemption categories in practice. As a result, determining whether an asset is exempt or not involves much more than merely comparing a list of your assets against a list of the applicable exemptions.

So navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney.

If You Do Own Non-Exempt Assets

Most people who file a Chapter 7 bankruptcy case lose nothing to the trustee because everything they own is exempt.  But what if you DO own one or more assets which do not fit any of the available exemptions? If you want to keep those assets, they can often be protected through a Chapter 13 case.  We’ll cover that in our next blog post.

 

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