I often suggest that persons with accounting or tax problems consult with a professional.  I must echo that advice here; I STRONGLY urge those contemplating bankruptcy or facing debt issues consult with an attorney.  It’s just too complex to “go it alone.”

 

Simply put, bankruptcy is a way to temporarily stop debt collection while the courts sort out the issues and then prevent all debt collection actions for the debts one had at the time of the filing (of the bankruptcy petition).  It’s serious business, not to be entered into lightly, although the thought of somehow magically “erasing” debts appeals to many.  It’s not as easy as that.

 

The first step after a person files for bankruptcy is usually the federal court granting an automatic stay which prevents creditors from collecting (or attempting to collect) debt.  While this step is often automatic, it’s rarely straightforward or without controversy.  Creditors can also petition the court, and frequently do (for relief from the automatic stay).  In many cases, creditors whose loans are secured by property (collateral) are permitted to take possession of that property.  The notion that you can erase debt AND hold on to your property is a myth.  Say for instance you owned several vehicles, including a 2008 Harley Davidson Ultra Classic Electra Glide.  You purchased this for approximately $23,000 and still owe approximately $19,000 with the motorcycle being the collateral for the debt.  The chances of you coming out of bankruptcy owing nothing on the “Hog” and still in possession of it are incredibly slim.   

 

After the courts and lawyers finally finish all their wrangling, the bankruptcy adjudication discharges your debts.  This discharge is, in effect, a forgiveness or elimination of your personal liability for all debts you incurred prior to filing for bankruptcy.  Once this happens, your former creditors have absolutely no claim on your future income.  For this fresh start, you must turn over non-exempt property (like your Hog) to a court-appointed trustee who is required to sell that property and distribute the proceeds to the creditors.

 

Bankruptcy does not discharge debts like taxes (no matter what some commercials say), those from fraud or theft, student loans, and alimony & child support. 

 

In exchange for this "fresh start," a debtor must turn over all non-exempt property to a court-appointed trustee (see Chapter 7 below). The trustee is required to sell the property and distribute the proceeds to the creditors.

A debtor can be denied a discharge for certain "bad acts" such as concealing or fraudulently transferring assets prior to filing.

Even if a discharge is granted, certain debts can never be discharged. These include: alimony and child support, student loans, taxes, and any debt incurred through the debtor's fraud or theft.  Those in bankruptcy have certain restrictions placed upon them and are under court supervision for the life of the bankruptcy plan.  They are forbidden to make new debts or sell assets without court permission.  They are often forced to live on a budget during the period of the bankruptcy plan, paying all excess income to the creditors.  Even if the debtor manages to repay all of his creditors in full, the bankruptcy will remain on his credit record, making it difficult secure future credit. 

 

It’s not easy, and it’s a serious step.  Get legal advice if you are contemplating bankruptcy.