What does bankruptcy mean to the person who owes money?
It usually means fast, long-lasting relief from the pain that creditors can inflict. The filing of a bankruptcy, no matter which chapter (i.e. 7, 11, 12, or 13) triggers the “automatic stay.” You might also call it the automatic “stay away” because means the creditors have to stop all efforts to collect what they say is owed them. It’s like a lifeline to those drowning – in debt.I don’t mean this to sound melodramatic. But when your car is about to be repossessed, your home is about to be foreclosed on, hourly wages are about to be garnished or your bank account has been unexpectedly drained by a levy, there is nothing as powerful or effective as filing bankruptcy.
What does bankruptcy mean to the person who is owed the money? Yes, I’ve been on that side of the equation too, when a former client who still owes a large bill (for something other than bankruptcy work) when I see they have filed bankruptcy, I know immediately to drop whatever attempts I had planned to make to collect that money from the former client. Granted, that’s only happened twice in my twenty years of practice. Still, when it happened, it became memorable. If I have a judgment, it goes in the trash. If I have a wage garnishment, I have to instruct the Sheriff and the employer to stop. If I have collected money through a bank levy, I must be prepared to immediately return that money to the person who owes it to me.
Bankruptcy is so powerful it can supersede virtually any contract.
Right now we’re seeing cities file for bankruptcy to get out of paying pensions they owe (and other obligations, too.) For individuals who owe, what bankruptcy means is protection, fast and powerful. “Unsecured creditors” – usually credit cards, signature loans, and, less frequently, deficiencies owed after a repossessed car is auctioned – are going to go away permanently in a Ch. 7. In Chapter 13, the person who owes – the debtor – will be required to pay back part of what he owes but only what he is able to pay.
What does bankruptcy mean to the secured creditors?
“The what?”, you say. Secured creditors are treated differently and much better than their unsecured counterparts. A secured debt is usually a home or vehicle, but it could be a business or just about any tangible thing. I suppose it could be an intangible thing, too, like a software license or copyright or trademark. Since I haven’t come across a case yet involving these intangibles, I’ll stick to what I know here. Here’s an example. Dick and Jane have a house and a car, both financed. Let’s say the car is financed with GMAC and the house through Wells Fargo. [By the way, the lenders’ names were chosen completely at random so don’t read in anything to that.] Dick and Jane’s vehicle, a GMC truck, “secures” the loan GMAC has on it, and the registration even says so: “Lienholder – GMAC”, etc. If Dick and Jane don’t make the payments, GMAC has the right to take the truck,, sell it and then, if they don’t get enough money to pay off the loan (which is pretty common) GMAC sues Dick and Jane.
Same thing with the house. Miss the payments and Wells Fargo can foreclose.
Unless Dick and Jane file bankruptcy, but what does bankruptcy mean then? If Dick and Jane thumb their noses at GMAC and Wells Fargo even after their bankruptcy is filed, those creditors will politely ask the bankruptcy court judge for permission to take back their collateral – i.e. the house or the car, respectively. And the judge will grant that permission. So, Dick and Jane have to have a Plan B if all they plan to do is file a Chapter 7 and walk away from their debts. If they want to keep the house, they must make the payments. If they’re behind, they can make up the arrears over time in a Ch. 13. If they want to keep the car, they’ll have to make whatever payment is required in their Ch. 13 or, if in a Ch. 7, either get current or “redeem” the car. Redemption deserves a page of its own, so more there later.