Credit: NCLC’s Consumer Bankruptcy Law and Practice
#1: A Bankruptcy Filing Stops in Their Tracks Foreclosures, Evictions, Repossessions, Utility Shut-Offs, Garnishments, and Other Creditor Actions
A bankruptcy filing will automatically and immediately, without any further legal proceedings, stop most creditor actions against a consumer and the consumer’s property—at least temporarily. A bankruptcy triggers an “automatic stay,” which stops the continuation of or the start of repossessions, garnishments, attachments, utility shut-offs, foreclosures, evictions, and debt collection harassment. The automatic stay provides time to sort things out and address the consumer’s financial problems. A creditor needs bankruptcy court permission to take any action against the consumer. Some creditors seek such permission immediately; others never seek permission.
Permission to continue collection activity is rarely granted to unsecured creditors. Secured creditors can get “relief from the stay” in a chapter 7 bankruptcy case to continue foreclosure or repossession of their collateral. But an automatic stay will almost always continue to be in effect to protect the consumer in a chapter 13 bankruptcy case if the consumer is making payments on the secured debt.
If the creditor violates the automatic stay, the creditor may have to pay damages and attorney fees, and the creditor’s actions can be reversed. For example, a foreclosure sale that is held in violation of the automatic stay can be set aside.
#2: Bankruptcy Discharges Most Debts
When a bankruptcy is successfully completed, many of the consumer’s unsecured debts, such as medical bills and credit card obligations are discharged. While a chapter 7 bankruptcy discharge usually cannot eliminate a lien on collateral for a secured debt, it eliminates the debt itself and any deficiency owed after a foreclosure or repossession.
Certain debts may not be discharged, such as most taxes, alimony, child support, and debts incurred after the bankruptcy case was started. Federal student loans can be discharged only if repayment will be an undue hardship on the consumer’s family. Certain private student loans can be discharged in bankruptcy.
#3: Bankruptcy Offers Protection Against Wage Garnishment, Bank Seizures, and Enforcement of Judgment Liens
After a bankruptcy filing, creditors are prohibited from garnishing wages or other income or a bank account. Bankruptcy even stops government agencies from recovering Social Security or other public benefit overpayments, if receipt of the overpayment was not based on fraud.
Bankruptcy is also an effective tool for dealing with some types of court judgments. If a court judgment for money does not create a lien against the consumer’s property, that judgment debt can be discharged in bankruptcy. If the judgment does create a lien on property, the consumer can file a motion to remove the lien if it affects “exempt property,” and then the creditor can never touch that property.
#4: Bankruptcy Prevents Seizure of Household Goods
Most families’ household goods are exempt from seizure, and the consumer can keep them even in bankruptcy, even when a creditor has taken household goods as security for a loan, if that loan was not used to purchase those goods.
#5: Bankruptcy Offers Flexible Solutions for Auto Loans and Home Mortgages
Bankruptcy provides added flexibility in dealing with creditors who take property as collateral for their loans, such as car and mortgage loans, even though the consumer must still make payments on these loans if they want to keep the collateral.
A chapter 7 bankruptcy lets the consumer keep a car by paying the creditor the lesser of what is owed on the loan or the car’s current value. If a car is worth $1,000, and the remaining amount on a car loan is $3,000, the consumer can keep the car by paying the creditor only the $1,000. The $1,000 payment usually must be made in a lump sum before the chapter 7 bankruptcy ends (usually after 3 to 5 months). Some creditors allow for that amount to be paid in installments over several months even after the bankruptcy ends, but that is up to the creditor. This right of redemption applies to any collateral that is personal property.
A chapter 13 bankruptcy allows for greater flexibility to keep property. For example, if a consumer is 6 months delinquent on a mortgage, filing a chapter 13 bankruptcy stops a threatened foreclosure and allows the consumer to catch up gradually on back-payments—over as many as 3 to 5 years. In some cases, a chapter 13 filing also allows for lowering monthly payments by extending the repayment period or lowering the loan’s interest rate. But the consumer must keep making payments until the loan is paid off. For certain car loans that were not recently purchased, the consumer may be able to pay off a loan balance reduced to the car’s current value over the life of a chapter 13 plan. For all car loans, the debtor may be able to pay the loan at a lower interest rate.
# 6: A Bankruptcy Can Stop Utility Terminations and Even Restore Terminated Service
A bankruptcy filing stops any threatened utility terminations and restores terminated service, at least for 20 days. To keep utility service beyond 20 days after the bankruptcy filing, a security deposit (usually equal to approximately twice the average monthly bill) must be paid and the consumer must keep current on new post-bankruptcy utility charges but need not pay the past-due charges incurred before the bankruptcy was filed. Often the consumer can take 60 days to pay the deposit and some utilities may not require a deposit.
#7: Bankruptcy Prevents Driver License Revocation for Debt Non-Payment and Can Restore Suspended Licenses
If a driver’s license was or will be taken away because of an unpaid court judgment—such as one arising from an automobile accident—bankruptcy normally can discharge the obligation to pay the court judgment, and the consumer then has a right to regain or retain the driver’s license. In a chapter 13 case, the consumer may be able to regain or stop a license suspension because of unpaid tickets for parking or traffic violations.
Talk to an Experienced Chicago Bankruptcy Attorney
Lorraine M. Greenberg has been a Chicago bankruptcy attorney since 1981. She is one of the leading Illinois bankruptcy lawyers in Chicago and its suburbs. She has been providing quality legal services for consumers and small businesses at affordable prices throughout Chicago and its Suburbs, and all of Northern Illinois since 1981. Contact Lorraine M. Greenberg today!
