Most people say they are trying to wipe out overwhelming credit card debts and / or medical debts.
Maybe they are trying to discharge old taxes or stop a home foreclosure.
Maybe they need to stop a wage garnishment caused by an old judgment.
The good news is bankruptcy can usually solve these problems.
But, it can’t solve all problems. And, some forms of relief are available only in certain bankruptcy chapters.
Let’s talk a bit about what bankruptcy can and cannot do.
The moment you file your bankruptcy, a court order called the “bankruptcy automatic stay” goes into effect.
This order tells your creditors to immediately stop all collection activity. There are a few exceptions; some are discussed below.
“Collection activity” might include calls, letters, debt lawsuits, garnishments, levies, reporting certain negative information on your credit report, or any other action that could be a direct or indirect collection attempt.
If you are a renter and you are being evicted from your home, the automatic stay might be able to temporarily stop your eviction.
But, you will need to file bankruptcy before your landlord gets a judgment of possession against you. Once the landlord has a judgment of possession, the landlord may proceed with the eviction as if you hadn’t filed for bankruptcy.
Yes, bankruptcy will usually suspend (“stay”) a debt lawsuit.
If you complete the bankruptcy successfully, the debt lawsuit will be dismissed. If you do not successfully complete the bankruptcy, the case can be reactivated.
I use the term “reactivated” because it covers a couple of different scenarios.
Many creditors will dismiss a debt lawsuit without prejudice as soon as they received notice of the bankruptcy. If you don’t successfully complete the bankruptcy, these lawsuits can be refiled later.
Some creditors will notify the court where the debt lawsuit is pending to “stay” or suspend all proceedings in the debt lawsuit until the bankruptcy is concluded. If you successfully complete the bankruptcy, the creditor will then dismiss the debt lawsuit. If you don’t complete the bankruptcy, the creditor will notify the court that the debt lawsuit can proceed.
For many reasons, it is much better to file bankruptcy before there is a judgment against you.
But, even if there is already a judgment against you, a bankruptcy can usually discharge your personal liability for paying the judgment.
If the judgment has already been used to place a lien on your assets, the bankruptcy may also be able to eliminate (“avoid”) the judgment lien.
But, lien avoidance is not always possible. And, it will make your bankruptcy more complex. This means higher fees.
If you know you are going to file bankruptcy anyway, consider filing before a judgment is entered.
In most cases, the bankruptcy automatic stay will stop a foreclosure in either a Chapter 7 or Chapter 13.
In a Chapter 7 bankruptcy, the automatic stay’s protection is very temporary.
In a Chapter 7, the mortgage company is likely to ask the bankruptcy court to lift the automatic stay so it can continue with the foreclosure if you are still behind on mortgage payments after you file your bankruptcy.
By contrast, Chapter 13 bankruptcy is designed to allow you catch up on payments over time while under the protection of the automatic stay.
The bankruptcy court usually cannot force a mortgage lender to modify a mortgage on a debtor’s primary residence in a Chapter 7 or Chapter 13 case.
Completely unsecured junior mortgages / lines of credit may be eligible to be “stripped” and treated as unsecured debt if certain conditions are met. In most bankruptcy jurisdictions, this can be done only in a Chapter 13 bankruptcy.
But, it is rare indeed to see this scenario in California these days. In recent years, home values have been appreciating at a rapid rate. (I am writing this as of April 2022…let’s revisit this in a year or two.)
Mortgages on investment properties are treated differently in bankruptcy.
A bankruptcy filing generally stops wages garnishments and bank levies, with a few exceptions.
It is possible to recover previously garnished or levied amounts if several criteria are met.
There are strict deadlines that apply, however. If you have been garnished or levied, contact an attorney immediately.
Chapter 13 bankruptcy filers are sometimes able to reduce the principal loan balance on a secured debt to equal the value of the property securing it. This is called a “cramdown.“
In a Chapter 13 bankruptcy, you can cram down loan balances on vehicles, investment property mortgages, or loans secured by personal property like furniture.
There are several restrictions on cramdowns. For example, you must have owned the asset in question a minimum amount of time.
But, it is a powerful tool to keep in mind if you are considering restructuring your finances.
The IRS can still audit you and issue demands for payment when the automatic stay is in effect.
But, the automatic stay does stop the IRS from issuing a tax lien, seizing your property, or garnishing your income.
Bankruptcy won’t stop a paternity lawsuit against you.
Bankruptcy will not stop actions seeking to establish, modify, or collect child support or alimony.
Bankruptcy will not stop criminal proceedings. But, if a criminal case also has a “debt component,” (for example, you are ordered to pay a fine), bankruptcy can in some limited cases stop the debt portion of the proceedings.
The automatic stay will not prevent your employer from withholding amounts to repay a loan from certain types of retirement plans and pensions. These include most IRAs and job-related pensions.
If you had a previous bankruptcy case pending during the past 12 months, then the automatic stay will terminate after 30 days unless you make a motion to extend the automatic stay and the motion is granted.
If you have an unusual situation and you are wondering if bankruptcy might be able to help, give us a call for a free initial consultation.
No two cases are alike, and almost all are unusual in some way. We will help you find a strategy that works for your situation.
Give us a call at (805) 284-0760 for a free initial phone consultation.