When you file for bankruptcy, your claim is filed with a bankruptcy court. This court will decide whether you are eligible to file, oversee the proceedings, and determine if you can discharge your debts.
Once you enter bankruptcy, however, you have potent protections against your creditors because you get an “automatic stay,” which puts a block on your debt from your creditors from collecting.
While the stay is in place, credits cannot garnish your wages, subtract any money from your bank account, or go after any secured assets like your home.
What Are the Advantages of Filing for Bankruptcy?
Despite its disadvantages, filing for bankruptcy is the proper course of action in many cases.
The advantages of filing for bankruptcy are:
- Filing for bankruptcy will trigger the automatic stay, stopping creditors from taking action to collect their debts and preventing creditors from repossessing property such as cars, including calling you, suing you, or sending you letters.
- You may be able to discharge your obligation to repay any of your dischargeable debts.
- Many debtors can go through the bankruptcy process without losing any of their property by using the bankruptcy exemptions.
- You will have a restart to your finances, and you can start to rebuild better credit.
What Is an Automatic Stay?
An automatic stay is an injunction issued automatically upon filing a bankruptcy petition that stops any claims or lawsuits by creditors against the debtor. The automatic stay does not discharge a debt; it merely stops any proceedings to collect the debt until the stay is lifted or the bankruptcy case ends.
An automatic stay restrains creditors from sending collection letters, calling the debtor regarding the collection, suing on the debt, garnishing wages, repossessing property, foreclosing on home mortgages, or any other activity to collect a debt. The stay continues until the bankruptcy case concludes.
What Is a Foreclosure?
Foreclosure can be a devastating event for many families. It means losing a house and not being in a wholesome financial situation. Foreclosure happens when the homeowner cannot make the monthly mortgage payments and is evicted from the home by the lender.
The lender holds power due to the agreement signed by the buyer of the home and the seller or lender. The house serves as collateral as stipulated in the contract.
Some lenders authorize a grace period in which the payment can be made before foreclosure ensues. Nonetheless, this period lasts only a couple of months before the property is foreclosed. Typically, if the borrower is behind on payments, it is more difficult to catch up on them because there are occasionally late fees.
What Are the State Laws Governing Foreclosure?
States have their own regulations and rules regarding the process of foreclosures. Several steps take place before the actual final step of when the lender takes your property through foreclosure. In 22 states, judicial foreclosure is the immediate way of dealing with home foreclosures. This means that the lender must go through the courts to establish that the borrower fails to make the monthly mortgage payments.
If the courts endorse the foreclosure, the local sheriff auctions the property to the highest bidder to recoup what the bank is owed, or the bank becomes the owner to resell the property. Some other states use non-judicial foreclosure, also known as the power of the sale. This process is more instantaneous compared to court intervention.
What Are the Consequences of a Foreclosure?
The foreclosure process is complex and can be overwhelming. It is essential to know your rights and what the banks are not permitted to do. Some banks can cross boundaries in the foreclosure process. Each state has its own set of regulations on dealing with the foreclosure process.
Here is a list of things to consider of what banks cannot do before foreclosing on the home:
- Some states require banks to resolve if the homeowner qualifies for a loan modification or other help before foreclosing on the house. If the bank chooses to do both at the same time, it is prohibited, also known as “dual tracking”;
- If the homeowner applies for some help or loan modification, the bank cannot begin the foreclosure process;
- The bank must get a court order and file for eviction before foreclosing the house;
- The bank cannot padlock your house if you are still living in it and;
- If you reinstate your mortgage before the sheriff’s sale, the bank cannot resume your foreclosure process.
Nevertheless, there are some things that the bank is authorized to do during the foreclosure process:
- Banks can padlock the residence if it is empty;
- The bank can seek alternative judgments if they are unable to sell the home at auction for what they are owed on the mortgage and;
- The bank can either request a non-judicial foreclosure or judicial foreclosure.
How Am I Protected from My Creditors When I File for Bankruptcy?
Once you file for bankruptcy, the bankruptcy court administers what is known as an automatic stay. This stay instantly keeps any of your creditors from taking action against you or your property.
The automatic stay keeps the creditors and bill collectors at bay, but it also offers you other protections. Other protections include:
- Temporarily precluding foreclosure proceedings against you.
- Preventing utility disconnections for at least 20 days.
- Stopping your wages from being garnished.
The money will no longer be taken from your paycheck before receiving it.
What If a Creditor Tries to Collect a Debt After an Automatic Stay?
If a creditor tries to collect a debt after an automatic stay has been given, a contempt of court action may be brought against the creditor.
In a contempt of court action, the creditor will be made to stop the collection attempts. The court may find the creditor, and the creditor may also have to pay damages caused by a violation of the automatic stay.
Suppose you have received your automatic stay and the creditor is still contacting or harassing you about the debt. In that case, you should notify the creditor that they have filed for bankruptcy, and all communications should be stopped.
A bankruptcy attorney can also assist you in contacting the creditor to have them stop the calls or communication.
What Must a Creditor Disclose to a Consumer?
A creditor must deliver the following information to a consumer for closed-ended credit transactions:
- Identity of the creditor;
- Amount financed;
- Itemization of the amount financed;
- Annual percentage rate, including applicable variable-rate disclosures;
- Finance charge;
- Total of payments;
- Payment schedule;
- Prepayment/late payment penalties; and
- If applicable to the transaction:
- Total sales cost;
- Demand feature;
- Security interest;
- Insurance;
- Required deposit; and
- Reference to contract.
A creditor must supply the following information to a consumer for open-ended credit transactions:
- Annual percentage rate including applicable variable-rate disclosures;
- Method of determining finance charge and balance upon which finance charge imposed, as explained in 12 C.F.R. Sec. 226.6;
- Amount or method of determining any membership or participation fees;
- Security interests if applicable to the transaction;
- Statement of billing rights; and
- Periodic account statement.
Do I Need a Bankruptcy Lawyer?
Filing for bankruptcy is a highly complex process. Bankruptcy law differs depending on where the action is filed and which chapter of bankruptcy is pursued. A local bankruptcy lawyer will know the particulars of filing for bankruptcy, recommend what chapter of bankruptcy is right for you, and ensure that your paperwork is filed correctly.
If creditors are still trying to collect after a bankruptcy action has been filed, a lawyer may be able to stop such collection efforts and may be able to get you some money damages.
