If you have forgotten to make a credit card payment either because you lost the bill or it just slipped your mind in the course of your busy life, you likely have received a call from a customer-service representative from the credit-card company or a collection agency demanding payment.
These collection calls are frequently accompanied by letters or, sometimes, even by by emails or in-person visits from bill collectors.This can be frustrating, annoying, and overwhelming for consumers. Bankruptcy, though, provides many protections to stop collection activity.
When an individual’s debts are too great to repay in any reasonable way and the debts are consuming so much of the consumer’s assets and income that they cannot make out a living, the person may have to declare bankruptcy. For individuals, there are two types of bankruptcy.
First, there is what is called Chapter 7 bankruptcy. This is the type of bankruptcy used when the consumer (the person owing debt to banks or other lenders) is declared to be essentially insolvent, meaning that there is virtually no way the individual can pay back the debts owed. In this situation, the consumer’s assets are liquidated, or sold off – though the law allows consumers to keep certain property called “exempt property” so that the consumer does not become destitute. After talking with an experienced bankruptcy attorney, some consumers learn that all of their property is exempt property that is protected from liquidation. Assuming some property is liquidated, the value of the liquidated assets will be held by the court through a trustee, who will allocate the proceeds from the sale of the liquidated assets to various creditors to satisfy the debts.
Second, there is Chapter 13 bankruptcy. This is sometimes called “worker’s” bankruptcy because rather than liquidating assets to pay back debts, the bankrupt consumer will work and pay back some or all of the debts over the course of a repayment plan. In this type of bankruptcy, the court organizes and adds up the various claims by the creditors to determine how much the consumer owes to whom. Also, the court will determine which creditors may have priority (such as the I.R.S., or creditors of secured debts such as mortgages or car loans) for repayment. The court and the court-appointed trustee then determine a payment plan that may last several years. The consumer will then be required to pay the trustee on a regular basis, usually monthly, until the plan is complete. The trustee then disburses the money appropriately to each creditor.
Prohibited Collection Practices
The moment a consumer files for bankruptcy, the consumer is protected by what is called an automatic stay. This stay prohibits creditors from demanding payment from the consumer for debts involved in the bankruptcy. The purpose of the bankruptcy stay is to prevent creditors from interfering with the proceedings of the court. The court, through the stay, ensures that the debts and assets at the beginning of the case are still present by the end of the trial.
During a stay, debt collectors are not allowed to contact consumers requesting repayment. Those creditors that do contact consumers even if they know that the consumer is under bankruptcy protection may face sanctions from the bankruptcy court.
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