You've probably heard the terms "personal bankruptcy", "corporate bankruptcy", and "bankruptcy protection" before. In a general sense they are all the same thing in terms of offering financial relief to individuals or businesses who are struggling with severe financial difficulty. Regardless of what you call it, the processes involved provide a measure of protection for the bankruptcy filer in relation to his creditors. Thus, a bankruptcy petition is often referred to as "bankruptcy protection."
The Idea of Protection
When our forefathers established the Constitution of the United States, they made provision for bankruptcy proceedings. This provision came from a long-standing principle of British common law that also allowed struggling individuals or businesses to find financial relief through bankruptcy. While this practice has always been considered a last resort, it's also been a common belief that individuals and businesses that find themselves in such dire straits need a little bit of compassion. That's where protection comes in.
Bankruptcy protection is the principle of forcing creditors to back off collection efforts while bankruptcy proceedings are underway. In terms of personal bankruptcy, this relieves the individual from the telephone calls at all hours of the day and night, the threatening letters, the annoying e-mails, and so on. From the court's point of view the individual should be protected from these things while he's attempting to satisfy as much debt as he can through bankruptcy.
Protection Varies by Chapter
According to federal bankruptcy law there are six types of bankruptcy proceedings available. For the purposes of this article we will use only two to illustrate the idea of protection. They are: Chapter 7 liquidation and Chapter 13 reorganization. We chose these two because they apply to individuals rather than corporations.
In a Chapter 7 liquidation bankruptcy the individual is offered protection in two ways. As previously mentioned, the primary protection comes by way of the court ordering creditors to back off on collection efforts. During the proceeding debt collectors will no longer be able to contact you regarding past balances due. That will put an end to all the annoying things we previously mentioned. For many individuals in bankruptcy this protection is a godsend; no longer having to deal with the high pressure of collection agencies takes a load off their shoulders which is immeasurable.
The second type of protection offered by chapter 7 liquidation is the fact that once your assets have been sold and the funds disbursed, any remaining debts considered to be dischargeable are automatically wiped out. Keep in mind that there are both dischargeable and nondischargeable debts. In other words, some will be wiped out with the bankruptcy while others you'll still be required to pay. Examples of dischargeable debts include credit card bills, revolving lines of retail credit, and many kinds of personal loans. Examples of nondischargeable debts include alimony and child support, student loans, and mortgages.
Chapter 13 Protection
Chapter 13 bankruptcy has an extra measure of protection due to the fact that it is a reorganization rather than a liquidation. With Chapter 7 all of your qualifying assets will be sold and the money disbursed to your creditors. With Chapter 13, all of your assets are protected as long as you can come up with a viable plan to pay off all of your debt within 3 to 5 years. This added asset protection is one of the reasons some individuals choose a Chapter 13 over Chapter 7 petition.
Like Chapter 7, chapter 13 filers will also enjoy relief from collection efforts. Until your bankruptcy is fully discharged your creditors will not be able to resume collection efforts on past balances. If you incur new debts which you're having trouble paying, all bets are off. Collection agencies can come after you for anything that you took on after the date you filed your bankruptcy petition. And just as there are nondischargeable debts with Chapter 7, they also exist in a Chapter 13 reorganization.
What Bankruptcy Does Not Do
Many people take the phrase "bankruptcy protection" to an extreme, believing it means more than it actually does. As an example, there are some who believe a Chapter 7 bankruptcy will wipe out all of your debts and give you a clean slate to start over with. Nothing could be further from the truth. All Chapter 7 bankruptcy protection does is to deal with certain types of debts you're unable to pay off. But as previously mentioned there are nondischargeable debts that you will not be able to wipe out. You will still have to pay your mortgage; you'll still have to pay your car loan; you still have to pay your student loans.
Furthermore, a bankruptcy will remain on your credit history for 7 to 10 years. During that time you will have trouble securing additional credit or helping your college-bound student attain financing. Believe it or not, you may also have difficulty getting a promotion at work or finding a new job. That's because employers now routinely look at credit ratings when making personnel decisions. It is a common belief that individuals who have trouble managing finances are also poor managers with work-related responsibilities.
Like it or not, bankruptcy does have a negative connotation and long-lasting consequences. Think long and hard before you file for bankruptcy protection - make sure you've tried everything else first.