One of the advantages of declaring Chapter 7 bankruptcy is that many of a debtor's outstanding debts will be discharged. This means that the debtor will no longer be obligated to pay his creditors back for these debts. While this will do great damage to the debtor's credit rating, it may benefit him financially. However, these discharges are not retroactive, and creditors are allowed to keep the money they've already collected, such as through wage garnishment.
Bankruptcy
When a person declares bankruptcy and the bankruptcy is accepted, he is afforded a number of protections against creditors. Under Chapter 7 bankruptcy, also known as liquidation bankruptcy, the person will have most of his debts discharged. However, this discharge order only applies to the outstanding balance on the debts. The discharge does not apply to the entire debt, meaning the debtor will not receive back the money he has already paid on the debts, either voluntarily or by force.
Debt Collection
After bankruptcy is declared and even before it has been approved, creditors are no longer allowed to seek the payment of debts. The creditor must wait for a judge to decide which debts the debtor is liable for and for a bankruptcy trustee to examine the individual's finances and decide how his assets should be apportioned. These creditors, however, will never be forced to return debts that they legally collected before the bankruptcy was declared.
Garnishment
Many creditors seek to compel the payment of debts by initiating garnishment against debtors. When bankruptcy is declared, creditors can no longer continue to collect money from garnishments that are currently in effect. If the creditor does continue to receive garnished funds after bankruptcy has been declared, these funds must be returned to the debtor, as they were seized illegally. In addition, the creditor may be liable for additional penalties.
Considerations
Even claiming bankruptcy may not be enough to allow a person to discharge his debts. In order for debts to be successfully discharged, a person must meet a set of criteria for Chapter 7. If the person is earning an income and has wages that can be garnished, he may not meet the criteria. Instead, his bankruptcy may be denied or he may have to undertake a Chapter 13 bankruptcy, in which he remains liable for his debts.
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