When you are researching bankruptcy and whether it is right for you, you will run across all kinds of new words and legal concepts. Bankruptcy is a complicated area of law, and one that many lawyers do not understand. This is a basic guide to bankruptcy and will give you the background necessary to discuss bankruptcy with a lawyer.
Defining Bankruptcy and the Trustee System
Bankruptcy is a debt relief process that is created by federal law. Bankruptcy is controlled by the United States Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. Bankruptcy protects debtors from their creditors, while also ensuring that creditor's rights are protected. In most cases, people will be relieved of all of their debts without making any further payments.
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Bankruptcy is the only debt relief program that your creditors are required to follow. If you do debt consolidation or credit counseling, you could spend thousands of dollars over months or years, and at the end, creditors could just ignore it. Creditors can't ignore bankruptcy. Once you file bankruptcy, your creditors must stop harassing you. Once you get your bankruptcy discharge, your creditors cannot ever try to collect the discharged debts from you again.
If you are not familiar with bankruptcy, the trustee system can be confusing. There are two kinds of trustees: 1) The United States Trustee, and 2) the panel trustees.
The United States Trustee and their attorneys are employees of the United States Department of Justice. They oversee the entire bankruptcy system and make sure that cases are administered according to the law. The bankruptcy judge has the final say in a case, but the United States Trustee does work of overseeing all cases in bankruptcy. If the United States Trustee has a problem with a case, they file a motion with the court. You have the right to respond to the motion and object. Motion practice is fairly difficult and you should contact your bankruptcy lawyer about any motions in your case.
The United States Trustee appoints a panel of private lawyers to act as "panel trustees" in chapter 7 and chapter 13 cases. The panel trustees are called either the chapter 7 trustee or the chapter 13 trustee. The United States Trustee delegates the running of individual cases to the chapter 7 and chapter 13 trustees. These panel trustee represents the interests of all of your unsecured creditors. These trustees are randomly assigned to cases and are paid a flat fee plus a portion of the plan payment in chapter 13 or a portion of any property recovered in a chapter 7. This is the trustee that you will see at the 341 meeting.
The 341 meeting is required of all debtors in bankruptcy. It is officially called the first meeting of creditors. Two things to remember about it: 1) it's the only meeting of creditors, 2) usually your creditors never show up. The 341 meeting is run by the panel trustee. You will be required to bring two forms of identification: 1) a photo ID, and 2) proof of your social security number. The trustee will ask you a series of straightforward questions like, "with your attorney's assistance did you sign the bankruptcy petition." Your bankruptcy lawyer should be able to predict if the trustee will have any concerns about your case or if the trustee will ask any specific questions. The judge is not present at the 341 meeting. You are put under oath and it is very important to tell the truth. It is always better to tell the truth than it is to lie or even to give evasive answers.
Benefits of Bankruptcy: The Automatic Stay and the Discharge
Bankruptcy stops creditor harassment. The moment that you file bankruptcy, you get something that is called the automatic stay. The automatic stay stops all efforts to collect any of the debts that are in your bankruptcy. This includes phone calls, letters, lawsuits, garnishments, A creditor has to ask the court's permission, and show good cause, if they want to keep collecting a debt from you. Unsecured creditors like credit card companies, debt collectors and medical billings cannot get relief from stay and cannot keep collecting from you. If a creditor violates the automatic stay, you may be entitled to damages.Further, filing a bankruptcy stops a garnishment.
Additionally, bankruptcy stops foreclosures. Even if you want to get rid of your house, bankruptcy can buy you some extra time. If you have more than one mortgage or if your house is underwater, bankruptcy prevents a deficiency judgment against you.
Bankruptcy also provides a way for you to save your house. Chapter 13 allows you to get current on your house and save it from foreclosure. If you suspect that there are problems with your mortgage or if you want to get rid of a second or third mortgage, chapter 13 allows you to do that as well.
The bankruptcy discharge is an order from the United States Bankruptcy Court that says you are no longer required to pay any of the debts that you put into bankruptcy and that your bankruptcy creditors cannot try to collect those debts ever again. It is entered at the end of your case.
For most people, all of their debts are discharged in bankruptcy. There are some exceptions for things like back child support/alimony, certain back taxes, student loans, criminal penalties, speeding tickets, and debts incurred through fraud. These exceptions to the discharge are examined on a case by case basis. Your bankruptcy lawyer can tell you more about it, after the initial consultation. You shouldn't worry about it though, most people get full discharges in bankruptcy.
Summing It All Up
This has been a quick overview of the bankruptcy process. Hopefully you have a better understanding of what bankruptcy is and how it works. This is not meant as a guide for people filing by themselves. Bankruptcy is very complicated, and it is always wise to work with an experienced bankruptcy lawyer.
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