When people think about bankruptcy, they often focus on debts and numbers. There isn't anything wrong with that approach, but it's also important to think about the protections available in bankruptcy. Particularly when it comes to the conduct of creditors, you must assert your rights and protect your interests within the law. Let's look at how bankruptcy attorneys can use the system to protect their clients from creditors' conduct.
One of the most basic protective elements of bankruptcy is the court order. Specifically, the judge will issue an automatic stay at the beginning of the process. The court will send an order in writing telling all of the petitioners' creditors to refrain from actions related to the case until the judge has heard it. For example, a creditor should stop making bill collection calls during the period of the stay.
The court order will also tell creditors to direct any questions or statements they might have about the situation to the court or the petitioner's lawyer. If they have a legitimate question about the case, usually the court will tell them to bring it up at the hearing. Bankruptcy cases tend to get moving within a few weeks or months so it usually isn't an inconvenience to the creditors.
Repossessions and Foreclosures
The stay-on-collection actions also prevent creditors from commencing repossession of foreclosure actions. Notably, this doesn't prevent a repossession or foreclosure if the creditor already obtained a court order before you filed your bankruptcy petition. However, it will stall any further actions until the court has heard the matter. It may not prevent the repossession of assets, but it will buy you time.
Underwater Loan Assets
Courts further protect petitioners by preventing creditors' claims on secured loan assets that are what finance people call underwater. This means the asset is worth less than the expected payment left. If a house depreciated significantly in value, for example, a court might determine the debtor has paid more than its value. This applies even if there is an outstanding principal from the loan. Bear in mind, though, that this decision is at the discretion of the judge.
Ultimately, bankruptcy seeks to discharge part or all of what the debtor owes to creditors. A judge will discharge the remaining debts once the petitioner has completed the process. In Chapter 7 cases, the judge discharges whatever can't be repaid after the court sells as much of the debtor's non-exempt assets as possible. In Chapter 11 and 13 cases, the judge dismisses the difference between what the debtor paid under a plan and what the previous debt amounts were.
For more information, contact a local bankruptcy attorney.