Income issues from loss of employment or inadequate pay can cause you to get behind on credit card debt, loans and medical bills. After months of delinquency, creditors and lenders may file a lawsuit against you to collect on the debt. Depending on the severity of your situation, bankruptcy is an alternative to stopping lawsuits.
What is Bankruptcy?
Bankruptcy is a legal process that can wipe out or erase consumer debts and outstanding loans. Filing for bankruptcy is often reserved as a last resort, when debtors are unable to fulfill their financial obligations. A judge determines whether a debtor meets the criteria for a bankruptcy; and after a court hearing, the judge handling the case decides to either dismiss the bankruptcy case or discharge debts. In the case of a discharge, debtors are no longer liable for their debts.
Filing Bankruptcy
Debtors often file for bankruptcy to protect their assets from bill collectors and to stop lawsuits. Filing bankruptcy creates an "automatic stay," which stops all creditors and lenders from collecting on accounts included within the bankruptcy filing. With this automatic stay in place, collectors cannot request payment, request judgments, send threatening letters or send an account to collection. All collection attempts cease until a judge hears the case and determines the outcome.
Creditors and Bankruptcy
Creditors and lenders typically do not appear in court, but they have the option of appearing at the bankruptcy hearing. The bankruptcy court will notify your creditors of the impending hearing, and they can contest the bankruptcy in order to receive monies owed.
Consequences
Even though filing bankruptcy offers protection from creditors and bill collectors, the consequences of a bankruptcy discharge are long-lasting. Credit score decreases are common after bankruptcy, and this decrease results in much higher rates on auto loans and other types of financing down the road, if you're able to qualify. Bankruptcy can stop an impending lawsuit, but before filing for bankruptcy protection, consider every possible alternative for paying your debt and avoiding long-term credit problems. You can set up an installment plan with creditors and bill collectors, or negotiate a debt settlement to satisfy the debt for less than you owe.
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