People often treat the idea of bankruptcy as a purely negative thing. It's wise, however, to see it as an important financial tool that can help you get control of a situation that might otherwise leave you buried in debt. Let's look at how bankruptcy attorneys use the process as a tool to help their clients.
A Court-Order Stay
When you submit your petition for bankruptcy relief, the judge will enter an automatic stay into the record. The court sends a notice to every creditor listed in the petition. The notice includes an order to stop all communications with you, the debtor. If the creditors need to communicate with you, they must conduct it with the court. Your lawyer will then convey the message if it is relevant.
The net effect is that harassing phone calls, letters, and electronic communications stop. If a creditor persists, the judge has broad leeway to sanction them.
Options for Restructuring or Canceling Debts
Another big weapon, arguably the most important one, is the ability to restructure or cancel some or all of your debts. Depending on your financial circumstances, the court may allow you to reduce part of the debts you owe. If the court permits you to restructure your debts, you'll submit a plan suggesting a percentage reduction.
A liquidation is also an option. This involves a court-appointed trustee selling your non-essential assets. For example, if a couple has three vehicles, the trustee would likely select the least practical vehicle and sell it to pay some of the unsecured debts. Once there are no more non-excluded assets to sell, the remaining value of the debt is discharged by order of the court.
Notably, it may be possible to mix and match the two options. Some folks will go through liquidation to address their unsecured debts, and then they'll pursue a restructuring to handle secured debts. Your unsecured debts are things like personal loans and credit card balances. Secured debts are things backed by property, such as car loans, secured lines of credit, and mortgages.
What Happens to Your Credit
Bankruptcy attorneys can't guarantee that your credit will benefit from the process. However, many lenders see the reduced debt load as a net positive. The bankruptcy does go on your credit record, though. With a reduced debt load, though, you will have the chance to try to get your finances in order and rebuild your credit.
For more information on how to use bankruptcy to your advantage, talk to a bankruptcy attorney today.