“What can bankruptcy do for me?”
It’s an important question to ask. You want to be sure bankruptcy can help you achieve your particular financial goals, and you may need a kind of relief that is only available in a certain bankruptcy chapter.
Below are some of the most common questions people ask us about the kinds of relief available in bankruptcy.
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Q: What does the automatic stay prevent or stop?
A: Most collection activity from your creditors.
Once notified of your bankruptcy filing, creditors and debt collectors must stop trying to collect from you.
“Collection activity” might include calls, letters, debt lawsuits, garnishments, levies, or any other action that could be a collection attempt.
This covers a lot of ground; some more specific situations are discussed below.
Q: I am behind on my rent. Can bankruptcy stop an eviction?
A: If you are a renter and you are being evicted from your home, the automatic stay may help buy you some time.
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, he or she may proceed with the eviction as if you hadn’t filed for bankruptcy.
Q: I am being sued on old credit card debt. Can bankruptcy stop the lawsuit? Should I file bankruptcy before or after the case is over?
A: A bankruptcy filing will suspend (“stay”) the debt lawsuit. If you complete the bankruptcy successfully, the debt lawsuit will be terminated. If you do not successfully complete the bankruptcy, the case can be reactivated.
For many reasons, it is much better to file the bankruptcy before there is a judgment against you. But, even if there is already a judgment against you, a bankruptcy can usually still discharge your personal liability for paying the judgment. The bankruptcy may also be able to eliminate (“avoid”) a judgment lien.
But, lien avoidance is not automatic and it will make your bankruptcy more complex. This will result in higher fees. If you know you are going to file bankruptcy anyway, consider filing before a judgment is entered.
Q: My mortgage lender has started foreclosure proceedings. Can bankruptcy help me save my house?
A: The automatic stay will stop a foreclosure in either a Chapter 7 or Chapter 13.
In a Chapter 7, the automatic stay’s protection is probably only temporary. 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.
After filing a Chapter 13, you would need to be able to resume regular monthly mortgage payments. You would also need to be able to pay a fixed portion of the past due mortgage payments each month while your case is ongoing (36 to 60 months). The amount you must pay each month is set forth in your bankruptcy payment plan and must be approved by the court.
Q: Can the bankruptcy court force my mortgage lender to modify my mortgage? What can I do about second mortgages?
A: The bankruptcy court usually cannot force a mortgage lender to modify a residential mortgage 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 many bankruptcy jurisdictions, this can be done only in a Chapter 13.
Mortgages on investment properties are treated differently in bankruptcy.
Q: Can a bankruptcy stop a wage garnishment or bank levy? Can I get some of the previously garnished wages or levied bank funds back if I file bankruptcy?
A: 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– under some circumstances, you will need to file bankruptcy within 90 days of the garnishment or levy to get the funds back. If you have been garnished or levied, contact an attorney immediately.
Q: What does the bankruptcy automatic stay NOT prevent or stop?
Some tax proceedings
The IRS can still audit you and issue demands for payment. But, the automatic stay does stop the IRS from issuing a tax lien, seizing your property, or garnishing your income.
Child support and alimony
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 may stop the debt portion of the proceedings.
Loans from a pension
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.
You can petition the bankruptcy court to extend the stay if you can prove the current case was filed in good faith.