There are many benefits of filing bankruptcy, for both businesses and individuals. The benefits of filing bankruptcy include but are not limited to, the discharge of overwhelming debt. However, filing for bankruptcy is not without its drawbacks and potential pitfalls. Considering the complexity of bankruptcy, it’s very important that people consult with experienced bankruptcy counsel to get an understanding of these benefits and drawbacks so that they can make an informed decision about whether or not to file bankruptcy.
Benefit: The Protections of the Automatic Stay
One of the most immediate benefits of filing bankruptcy is the automatic stay. This is, not surprisingly, an automatic federal injunction against creditor collection efforts. This means that, immediately upon filing bankruptcy, you are protected by the automatic stay. Generally speaking, the automatic stay is an extremely effective “shield” against creditor calls, lawsuits, wage garnishments, foreclosures, repossession, and other creditor collection activities. If creditors ignore the automatic stay, or refuse to fix their violations of the automatic stay, these creditors may be subject to sanctions by the bankruptcy court. This means that the bankruptcy court may order that these creditors pay you back for any damages you may have suffered as a result of their violations of the stay, including your legal fees and costs. While the automatic stay is extremely expansive, it does not stay certain actions such as certain parts of matrimonial actions. The automatic stay also does not apply to criminal cases or certain tax related actions. Further, in certain circumstances, the automatic stay can be modified by the bankruptcy court to allow creditors to continue their collection actions. Also, if you have filed one (1) or more bankruptcy cases within the year prior to the bankruptcy case, the automatic stay will either expire after a short period of time, or will not go into effect at all.
Benefit: Discharge of Debts
Another one of the most helpful benefits of filing bankruptcy is the discharge of debts. For many people, their main goal in filing for bankruptcy is to obtain a discharge order. This is a federal court order that acts as a permanent injunction against creditor collection of certain pre-bankruptcy debts. These debts generally include credit cards, business loans, medical bills, utility bills, and most other kinds of personal or business debt. A discharge permanently wipes away these kinds of dischargeable debts, leaving the person free to use their income and assets without the threat of loss to creditor collection actions, and free from burdensome interest, fees, and charges which were holding that person back from continued financial growth. Note, however, that certain debts are not dischargeable, such as certain taxes, child support and alimony, and other specific kinds of debts that are protected from discharge by the Bankruptcy Code, and that some kinds of debts are only dischargeable in certain types of bankruptcy cases.
Benefit: The Protections of Federal Bankruptcy Exemptions
Exemptions are a legal concept under both federal and state law, which is why they are one of the most advantageous benefits of filing bankruptcy. These are protections for assets that prevent creditors from taking control of those assets even despite an outstanding debt. Under New Jersey law, there are practically no exceptions available. However, in bankruptcy, there are federal exemptions available to be claimed to protect a range of assets. These include certain amounts of exemptions to protect home equity, equity in an automobile, and even cash in a bank account. Therefore, another one of the benefits of filing bankruptcy is that the process may offer you more protections for your assets than outside of bankruptcy. Note, however, that exemptions can be challenged by a trustee, by the court, and by your creditors. In addition, there are specific limits to the amount of certain exemptions. Also, it’s important to note that exemptions also apply only to the debtor’s interest in certain assets.
Benefit: Bankruptcy Rule 2004 Discovery
One of the most beneficial benefits of filing bankruptcy are the tools available to debtors and creditors alike in a bankruptcy is a bankruptcy rule that allows for the collection of information, which is referred to as discovery. Bankruptcy Rule 2004 permits debtors, creditors, and other parties the ability to use a subpoena to collect documents, information, and even deposition testimony they need in order to protect their rights and interests in connection with a bankruptcy case. This kind of expansive and relatively easy ability to collect discovery is really not available in any other place other than in a bankruptcy case. This power can be extremely helpful to debtors struggling with unknown creditors, or with legal issues that are preventing them from reorganizing their finances. Note, however, that Rule 2004 cannot be used to collect discovery that is unrelated to the bankruptcy case, or for use in other litigation or proceedings outside of the bankruptcy court.
Drawback: Temporary Loss of Access to Credit
Most people who file for bankruptcy lose access to the credit they’re accustomed to using on a daily basis, such as their credit cards. The companies that issue credit cards generally close down a debtor’s account upon learning of the filing of their bankruptcy. As a result, debtors have to learn to live on a cash basis, and to use a debit card or checks as their main method of payment. This is especially true in Chapter 11 and Chapter 13 cases where debtors remain debtors-in-possession for an extended period of time as they consummate their plans of reorganization. In a Chapter 7 case, debtors may be able to get back to using credit cards more quickly. Using this type of revolving credit can be helpful to rebuild your credit, although the credit that you may initially obtain may come with higher interest rates and fees, and lower credit limits.
Drawback: Initial Reduced Credit Score
It may come to no surprise that filing bankruptcy is not initially good for your credit score. However, conversely, you may be surprised to learn that, in some cases, a debtor’s credit score, while negatively impacted in the short term, may greatly improve in the long term because of the benefit of discharge of overwhelming debt obtained through the bankruptcy process. Credit scores can be negatively affected by large amounts of debt, which negatively impact people’s debt to income ratios. Carrying a large amount of debt can prevent people from obtaining mortgages or other credit they desire, because lenders’ calculations take into account how that person may be carrying all of that debt on a monthly basis. If a person completes bankruptcy and obtains a discharge of most of their debt, they’ve greatly improved their debt to income ratio and, despite the negative impact of the bankruptcy filing, the process actually resulted in a separate, related positive impact. How your credit score may be impacted depends on a number of factors, and has to be considered on a case by case basis, and to take into account your short term and long term goals.
Drawback: The Bankruptcy Stigma
It may also come as no surprise that bankruptcy carries a negative stigma. Despite the relief it offers to millions of people each year, bankruptcy is still a negative word to some people. However, the good news is that while bankruptcy is technically in the public record, it’s not that easy for the average person to search the bankruptcy court records. This means, practically speaking, that for most people their bankruptcy filing remains fairly private. If someone is determined to search for your bankruptcy filing, they can find it by accessing bankruptcy court records. However, it’s highly unlikely that anyone can ever simply “Google” your name and locate a bankruptcy record. Just as with any other financial issue, your bankruptcy filing is your private business, and does not need to be shared with anyone else.
The Benefits of Filing Bankruptcy with Middlebrooks Shapiro
Weighing the benefits and drawbacks of bankruptcy is a complicated and highly fact sensitive process. The experienced bankruptcy attorneys at Middlebrooks Shapiro are well versed in personal bankruptcy and business bankruptcy options. Our team will consider your specific situation and assist you in weighing the potential benefits of filing bankruptcy, as well as any potential drawbacks you might face. Ready to reap the benefits of filing bankruptcy? Schedule a free, no obligation consultation with a Middlebrooks Shapiro attorney today!