Bankruptcy protection is a process by which people can resolve their debt problems in a way that is most beneficial considering the interests of both the debtor and creditor. We are in the business of helping to resolve those stalemate situations where everyone, creditors and debtors alike, are in a losing battle.
It does you no good to go on and on in a seemingly unresolvable financial situation that is doing nothing but causing stress and loss of sleep. Likewise, it does your creditors no good to also go on and on, wasting resources trying to collect debt that you simply don't have the resources to pay!
Step 1, The Stay
So, first we call a "time out" in the chaos. Stop the late fees and interest on top of interest on top of interest. This time out happens when the debtor files for Chapter 7 or Chapter 13 protection. Upon filing, an automatic "stay" is issued. A "stay" is the judicial equivalent of a referee in a football game throwing out a yellow flag. It stops all of the action so that the chaos on the field can be sorted out. If the quarterback is buried in a mountain of tacklers and a fight has broken out on the field, orderly game play cannot begin until that flag is thrown, the game stopped, and it is reorganized.
In a similar way, many debtors who fall behind in payments for one reason or another (job loss, medical expenses, adjusted mortgage rates, credit card rate hikes, etc.) find themselves essentially being "tackled" from every side by their creditors. The situation is so chaotic with multiple phone calls, late fees, foreclosure threats, lawsuit threats, that nothing productive can really be done. So, we file a Chapter 7 or 13 petition . . . and the judge blows the whistle and throws a flag onto the field (the stay) to stop the chaos.
Upon the throwing of that flag, all action on the field must stop and everyone must go back to the sidelines. The creditors have to stop calling, the foreclosures have to stop, the threatened repossessions or lawsuits have to stop, and everything is on time-out status.
Step 2, The Plan
Once this timeout has been called, with our help, you evaluate what you can afford to pay and what you cannot, and come up with a plan. In a Chapter 7, this plan will essentially include payment of as much debt as can be paid through a one time selling of all non-exempt assets (unlimited equity in your home is "exempt" or protected under Florida law). In a Chapter 13, the plan will include a reorganization of your finances and the payment of as much debt as can reasonably be paid in 3 to 5 years. In some cases, where a debtor may have lost his or her job and has virtually no income, the amount that can be paid to creditors may be very little or even nothing at all -- these calculations are all very individual.
Step 3, The "Discharge" or "Debt Cancellation"
At the conclusion of the proceeding, the remaining dischargeable debt is "discharged" or "cancelled." Accordingly, after your best efforts at repayment, you get a fresh financial start to begin rebuilding good credit (and don't be fooled by creditors who claim you can't get credit following a Chapter 7 or 13, most clients get inundated with credit solicitations as soon as the bankruptcy case is complete!)
This is a very simplified overview of the process, and the myriad of technicalities present in the modern day bankruptcy law should definitely not be tackled without legal advice from one very familiar with the intricacies of the law. For example, not all debts are dischargeable in bankruptcy and certain debts may only be discharged in Chapter 13, but not Chapter 7, so any summary of bankruptcy procedure cannot take the place of individual legal advise by qualified counsel.
The modern American Bankruptcy Laws have their roots in biblical principals. See "Bankruptcy and the Bible." For example, under old testament law, all creditors were required to cancel debts every 7 years. Dr. Donald Morgan, PhD, a Senior Economist with the US Federal Reserve Bank of New York, has recently completed a study in which he contends that the 2005 restriction of bankruptcy relief bottled up this safety valve and in so doing, piled up excessive debt, helping to cause the financial meltdown we are experiencing today. See "Seismic Effects of the Bankruptcy Reform."
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