Bankruptcy is usually the option of last resort for a person facing financial distress. Under some circumstances, however, a bankruptcy filing may prove to be a consumer’s best option for dealing with a financial problem. Debtors facing an eminent foreclosure or repossession, a wage or bank account garnishment, or IRS collection activities are among the debtors who may find bankruptcy to be the best alternative.
Preventing foreclosure or repossession is a major reason to file bankruptcy
Filing a bankruptcy case creates an automatic stay which precludes creditors from taking collection activities without bankruptcy court approval. The bankruptcy automatic stay immediately stops all foreclosure or repossession proceedings and any foreclosure or repossession steps taken by a creditor after the debtor files for bankruptcy are invalid. A bankruptcy filing protects the debtor’s equity in the property and provides the debtor with an opportunity to either keep valuable property or to sell the property in an orderly manner.
If the debtor is able to resume making regular monthly payments on the debt, then the debtor will probably be able to keep the property. The debtor will still need to provide for payment of any arrearage on the loan, either through the debtor’s chapter 13 plan or through a negotiated arrangement with the creditor. Additionally, if the debtor has a substantial amount of equity in the property, then the bankruptcy court will usually allow the debtor a reasonable amount of time to sell the property so that the value of the equity in the property can be preserved.
Additionally, for a debt secured by property other than the debtor’s primary residence, the debtor may be able to reduce the amount of the secured debt to the replacement cost of the property. This is particularly true with motor vehicles, as motor vehicles frequently depreciate rapidly and therefore are worth less than the amount of the debt. In that case, the amount of the secured debt can usually be reduced to the amount of the replacement cost of the asset as of the date of the bankruptcy filing, with the remainder of the claim being handled as a general unsecured claim. In other words, the debtor may be able to retain his vehicle without having to pay the full amount of the automobile loan.
Avoiding garnishments is a major reason to file bankruptcy
A garnishment is a legal proceeding, used by creditors, to attach property or money owed to a debtor, which is in the possession of a third party, in payment of a debt owed to a creditor. Garnishment actions are usually initiated by a creditor either to seize the funds in a debtor’s bank account or to attach a debtor’s wages. The bankruptcy automatic stay stops garnishment actions just like it stops other collection actions.
In addition to the automatic stay, bankruptcy law offers another important protection from garnishments. Under some circumstances, a debtor (or the bankruptcy trustee) may set aside a garnishment as a preferential transfer. Even if the debtor’s money or property has already been transferred to the creditor, the debtor (or the bankruptcy trustee) may still recover the money or property from the creditor if the garnishment occurred within 90 days of the debtor’s bankruptcy filing and if the garnishment resulted in the creditor collecting more than it would have otherwise collected in the bankruptcy case.
Bankruptcy law provides debtor’s with substantial protections from garnishments not available under non-bankruptcy law. The avoidance of garnishment proceedings is a major reason to file a bankruptcy case.
Resisting IRS collection activities is another major reason to file bankruptcy
The bankruptcy automatic stay even works against the IRS! Bankruptcy prevents even the IRS from continuing with collection activities against a debtor without bankruptcy court approval.
Additionally, some taxes can be discharged in a bankruptcy. This means that the debtor may be relieved from the responsibility to pay certain taxes. Generally, taxes are dischargeable if the taxes arise from a tax year more than 3 years before the debtor filed bankruptcy, and any required tax return for those taxes was filed at least 2 years before the debtor filed for bankruptcy, and the taxes were assessed against the debtor at least 240 days before the debtor filed for bankruptcy. In other words, if a debtor owes taxes that are more than 3 years old and meets the other requirements, then the debtor may be able wipe out his liability to the IRS in a bankruptcy.
Stopping foreclosures and repossessions, stopping garnishments, and stopping tax collection activities represent 3 scenarios where bankruptcy law may provide debtors with a significant advantage over non-bankruptcy law. A debtor may take advantage of the bankruptcy automatic stay to stop all collection activities. Additionally, a debtor may use actions available only under bankruptcy law such as avoidance of preferential transfers and discharge of certain tax liabilities as protection against garnishment and tax collection actions. These situations represent 3 major reasons to file a bankruptcy case.