Consumer Bankruptcy Basics Part I: The Benefits of Personal Bankruptcy

In contemplating potential topics for a blog post this week, I was reminded of the debt-ridden Michael Scott, in NBC's The Office, attempting to free himself of his debt obligations by announcing to his colleagues in a loud voice, "I DECLARE BANKRUPTCYYYYYYYY!"  Moments later, a coworker gently informed him, "I just wanted you to know that you can't just say the word 'bankruptcy' and expect anything to happen."  Scott's response: "I didn't say it, I declared it." 

This exchange, though comedic hyperbole, portrays a pervasive misunderstanding of the bankruptcy process and the bankruptcy options available to individual consumers.  So, in an effort to provide individuals with a better understanding of their options and to dispel some common myths and misconceptions, I begin a multi-part series of weekly posts to explain the consumer bankruptcy process.  This week, we begin with the benefits of filing for bankruptcy.

A brief disclaimer:  To be clear, this series of posts is not intended to be legal advice or a primer on how to file bankruptcy and navigate the process, but rather a plain-English description of the process and the options available.  Always consult a competent attorney before making decisions about taking legal action.

With that out of the way, we start with the benefits of bankruptcy.  The two primary benefits of personal bankruptcy are the Automatic Stay and the Discharge. 

The Automatic Stay is not something many people know about before they have gone through the bankruptcy process, but it can be a great source of relief and sanity to the consumer who is drowning in debt collection notices, phone calls, and perhaps even lawsuits and foreclosure notices.  Within days of filing a bankruptcy petition, all collection calls and notices suddenly stop.  Once a person files, creditors are notified of the bankruptcy and are "stayed" attempting to collect most types of debts.  Most lawsuits and other legal actions are also stayed. And of great benefit to many consumers in these trying times, home foreclosures are also put on hold.  While individual creditors (particularly the bank with the mortgage on your home) can get the Bankruptcy Court to grant relief from the Automatic Stay if certain conditions are met, the Automatic Stay provides at least a temporary reprieve and an opportunity to regroup and plan for the future.

The other primary benefit, and often the purpose of filing bankruptcy in the first place, is the Discharge.  Discharge is the ultimate goal of most consumer bankruptcies.  At or near the end of the process, the court will grant the debtor a "Discharge in Bankruptcy."  The discharge basically declares that all debts acquired before the bankruptcy are discharged and may never be collected.  After the discharge is granted, it becomes illegal to even attempt to collect a pre-bankruptcy debt.  Essentially, the debt just goes away.

There are some exceptions to the discharge.  For example, most debts to government entities like taxes and student loans are not discharged.   Child support, alimony, and similar obligations likewise survive the discharge.  In addition, creditors or the trustee (the professional responsible for ensuring that nonexempt available funds get distributed to creditors--see next week's post about the drawbacks of bankruptcy and the following week's post about the Chapter 7 option for more details) may object to the granting of a discharge if the debtor is guilty of fraud, concealing funds, or similar shenanigans.  It is also worth mentioning that while the discharge prevents creditors from attempting to collect debts, they can still foreclose--so if you want to keep your house and car, you had better keep making those mortgage and car loan payments.  (Secured debts, such as home mortgages and car loans, are actually a great deal more complex than I describe here, but this explanation gives you the general idea).

Those are the two primary benefits of filing bankruptcy.  There are obviously others, including opportunity to work with the helpful and brilliant members of the bankruptcy bar, such as ourselves.  Stay tuned for Part II next week about the drawbacks and costs associated with filing bankruptcy.