Collection lawsuits annoy those who receive court papers. People don’t want to get in debt. The time, energy and cost of answering court papers can boggle the mind.
When one of your creditors sues you in small claims court or any other court you must appear and you must file papers. Filing bankruptcy puts a halt to nearly all civil suits. The automatic stay provision of U.S. Bankruptcy law stops suits against you instantly the moment you file bankruptcy.
Section 362 of the U.S. Bankruptcy Code imposes an automatic stay on collection actions. With the force of a federal injunction, the automatic stay of bankruptcy law stops all collection activity including phone calls, letters and collection lawsuits.
How Can Filing Bankruptcy Stop Collection Lawsuits
If you are eligible for a chapter 7 bankruptcy then at the end of your case you will receive a discharge, terminating your personal liability to pay most debts. In the beginning of the case your attorneys will file a special document known as a ‘Suggestion of Bankruptcy’ automatically requiring collection attorneys to back off. This action also requires the court in where the collection case is pending to “stay” the court case. A “stay” means that nothing can happen as long as your bankruptcy case is active.
In some cases chapter 7 bankruptcy might not be possible. If your household income is too high and you fail the means test, or if other facts exist, a chapter 13 bankruptcy may help. In a chapter 13 bankruptcy your goal will be the same, to ultimately obtain a bankruptcy discharge. However, before a discharge is issued you pay a percentage of your debt back through a 3 to 5 year chapter 13 payment plan.
Are all Debts Discharged in Bankruptcy?
Not all debts are discharged in bankruptcy. Student loans cannot be discharged unless you can prove what the law calls “undue hardship”, which the courts view harshly. Domestic support obligations are not dischargeable. Fraudulently obtained loans and credit cards cannot be discharged. Another non dischargeable debt is any restitution order for death or personal injury caused by you while driving intoxicated or under the influence of a drug or any other substance.
Categories of debt not dischargeable in bankruptcy are listed in section 523 of the U.S. Bankruptcy Code.
What Debts are Discharged in Bankruptcy?
Don’t let the above list scare you. Most debts troubling people facing financial struggle are dischargeable. Debts that can be discharged in bankruptcy include:
- Credit Cards
- Collection Agency Accounts
- Medical Bills
- Lines of Credit
- Deficiency balances from repossessions
- Business debt
- Past due Utility Bills
This is only a partial list intended to summarize the most frequent types of debt wiped away in a successful bankruptcy filing.
Are Past Due Taxes Discharged in Bankruptcy?
The last two sections addressed debts that either can or can’t be discharged in bankruptcy under normal circumstances. There are other types of debt that can be discharged under certain special circumstances. Back income taxes fall into this category.
Old income tax debt can only be discharged in bankruptcy where three conditions exist: The tax must have come due more than 3 years before the bankruptcy filing; it must have been at least 2 years since you filed a tax return, and it must be at least 240 days since the IRS assessed the tax.
There are many exceptions and conditions, the most important of which is that a valid return must have been filed. The law allows discharge of past due taxes, not evaded taxes. Where the government makes the rules, the government doesn’t make it easy to get rid of your tax obligations. But, under the right circumstances, it can be done.
Collection Lawsuits
If you’ve looked at the U.S. Bankruptcy Code itself you’ve seen it can be a challenge to read. If you have looked at the many materials available on bankruptcy, online, in news sources, books and elsewhere, you’ll see that the law and interpretations are full of exceptions, cross references and conditions.
The idea of declaring bankruptcy can be overwhelming. There are many forms, schedules, statements and the petition itself. Immediately after you file, you must send certain documents to a bankruptcy trustee and prepare for a creditors meeting. You should not have to go through this alone.
When financial problems face you, timing is important.
If you have missed credit card or other payments, retaining an attorney to act quickly can make the difference between facing threatening phone calls, lawsuits or other collection activity and taking control of your finances. So it makes sense to consult with an experienced bankruptcy attorney to review your individual circumstances and to determine how the bankruptcy process applies to you.
Sources:
United States Bankruptcy Code Sections 362, 523 & 727
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Once you’ve been discharged you’ll no longer be bound by the restrictions of your bankruptcy order, but unfortunately, that’s doesn’t mean all your finances will go back to normal straight away.
I don’t agree that bankruptcy filers are “no longer bound” by the bankruptcy order. As one example, if you are designated to inherit money by way of a death within 180 days after the filing date this must be reported to the bankruptcy trustee who handled your case even if the case is closed. Also, if you’ve learned there was an error or an omitted creditor, you’re going to have to reopen the case to amend your filing.
I do agree that after a bankruptcy your finances will not return to normal right away, but as I’ve discussed in other blog articles on this site there are things you can do to take control of your finances before, during and after the bankruptcy. Despite what many think and as discussed in another blog on this site, there are steps people can take to rebuild credit.