Should you file bankruptcy? Part 3

One of the main reasons that individuals file bankruptcy is to receive relief from their creditors.

Should you file bankruptcy? One of the main reasons that individuals file bankruptcy is to receive relief from their creditors. This relief is initially in the form of the automatic stay. The automatic stay goes in effect immediately upon filing a bankruptcy case. In general the stay prohibits collectors from continuing collection activities unless and until the Court gives them permission to continue. You may have read bankruptcy advertising that states such claims as “stop garnishments,” “stop creditor calls” or “stop foreclosures.” The reason for the claims is that the automatic stay, when applicable, has the ability to stop all of these actions.

For someone facing wage garnishment or in danger of losing their home to foreclosure, the automatic stay can provide welcome relief. But what about the debt problem that led to the garnishment or foreclosure? How the debt is dealt with largely depends on what chapter is filed. One of the most common and well-known options is to file for relief under Chapter 7 of the Bankruptcy Code.

Chapter 7 is considered a “liquidation” bankruptcy. You may have heard of a “liquidation” sale where all the inventory of a business is to be sold. In a chapter 7, the “liquidation” would be the sale of all the Debtor’s non-exempt property with a distribution of the proceeds to the creditors. See my last article for a discussion of property and exemptions. If an individual receives a discharge in their bankruptcy, the Debtor’s personal liability to pay most of their debts is removed. So debts can be fully or partially satisfied through a distribution of liquidated assets or the Debtor’s personal liability to pay the debts can be discharged. Therefore, a chapter 7 can bring relief from creditors and resolve the debt issues. However, there are many exceptions, so it is prudent to seek the counsel of an experienced attorney.

There may be at least two good reasons to file under chapter 7 – relief from the collection process when no other good alternatives exist and to deal with the debt that has become unmanageable outside the assistance of the bankruptcy process. The answer to the question, “Should you file bankruptcy?” largely depends on whether you have reached the threshold in the above areas. For those of you with money problems, Michigan State University Extension offers a variety of money management programs throughout the state of Michigan, check out MI Money Health for more information.

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