Giving Thanks for Bankruptcy
This Thanksgiving, we have much to be thankful for among the basketful of benefits provided by the bankruptcy laws.
#1: The Automatic Stay:
Bankruptcy stops just about everything that a creditor could do to you or to your property. It stops garnishment of paychecks and bank accounts, lawsuits, judgments, home foreclosures, tax liens and levies, and vehicle repossessions Filing bankruptcy stops these if they are in process, and also prevents them from starting in the first place.
This protection happens the instant your bankruptcy case is filed. So if your attorney files the case—usually electronically from his or her office—one minute before a foreclosure sale, or as the repo man is getting ready to tow your car, or just before the IRS records a tax lien on your home and possessions, then the foreclosure does not happen, the repo man leaves empty-handed, and the IRS does not get its tax lien.
The power and speed of this bankruptcy protection is something to be thankful for.
#2: The Discharge of Debts:
“Discharge” is a legal determination that you no longer owe a debt. In a Chapter 7 “straight bankruptcy” all or most of your debts are discharged usually three to four months after the case is filed. In a Chapter 13 “adjustment of debts,” all or most of your debts that exist as of the completion of the case are discharged then.
The ability to wipe away debts should not be taken for granted. The U.S. Constitution empowers Congress to make laws about bankruptcy, but does not require the discharge of debts. For hundreds of years of bankruptcy’s history, there was no such discharge. In fact, bankruptcy—believe it or not—for much of its history was primarily a tool for creditors to get assets out of a debtor. In total contrast, now under the law all debts are discharged except for those fitting within specific listed exceptions.
A fresh start unburdened by debts is certainly something to be thankful for.
#3: Property Exemptions:
Most people who file bankruptcy do not lose any of the assets they own. That’s because of state and federal laws which accept the reality that you need a certain minimum set of possessions to be able to get a realistic fresh start. These laws acknowledge that if everything is taken from you and given to your creditors—if you have no vehicle, no roof over your head, no cash at all or money in your account, no basic household furnishings or personal effects—after your bankruptcy case was finished you would not be able to become a productive member of society.
It’s easy to be thankful for being able to discharge your debts while losing little or none of your possessions in the process.
#4: Limited Non-Dischargeability:
In many bankruptcies, all debts that the debtor wants to discharge are discharged. The two potential sets of exceptions are generally sensible ones.
First, debts that were acquired in a fraudulent way may not be discharged. For example, if a person gets a loan by lying about her financial history, or by embezzling money from her employer, or by writing a check knowing that it won’t be good, the discharge of that debt can be challenged. Bankruptcy law understandably does not want to encourage cheating.
Second, certain kinds of debts that serve some very important societal purpose are not discharged: child and spousal support, recent income taxes, criminal fines and restitution, personal injuries or property damage resulting from intentional or reckless behavior, debts arising from drunk driving, and most student loans. Most of these categories are very strictly defined, and some contain exceptions—for example, most older income taxes can be discharged, as well as those student loans causing an “undue hardship.”
We can be thankful that creditors have quite limited legal grounds for challenging the discharge of their debts.
#5: Vehicle Loan Reaffirmation:
A reaffirmation is a voluntary and selective exception to the discharge of debts. In the case of a vehicle loan, your reaffirmation of that loan excludes that loan from the discharge of all the other debts. Its purpose is to enable you to keep the vehicle. You agree to maintain the payments and remain liable on the debt, and so the creditor allows you to keep the vehicle under the original contract. Being able to create your own exception to discharge gives you flexibility to keep collateral while discharging all or most of your other debts.
This flexibility achieved through reaffirmation of a select debt or two makes bankruptcy much more practical, something to be grateful for.
In the next blog post, we’ll cover some other benefits of bankruptcy worthy of thanks.