How Does Bankruptcy Work?
The instant an individual files a petition for bankruptcy relief, a profound group of protections spring into effect. Technically, as the bankruptcy court records the petition, an “order for relief” issues automatically and simultaneously. This is a function of the way the law is written, not some guy in a wig and robe banging on a gavel. The “order” produces powerful effects, nonetheless.
Among other things, the order instantly prohibits (or “stays”) most creditor activity. This means all foreclosures, repossessions, garnishment, harassing phone calls and letters are stopped in their tracks. In fact, the order prevents primarily all communication from creditors whatsoever. Because the stay issues immediately, it is called the “automatic stay.”
The bankruptcy case is then administered, which may involve selling assets or confirming a payment plan, depending on the different goals and situations of the individual’s case. For example, if you got behind in your mortgage payments, but want to keep your house, you may propose a plan to pay off the arrears over time, while continuing with current payments and keeping others to a minimum. On the other hand, you may be better off giving your house up (if you have one). If you do abandon your house, then the court will most likely allow you to discharge all the associated debt.
When the case has been fully administered, the court enters a final order that once and for all discharges your personal obligation to pay certain debts. After this order, essentially any reference by a creditor to a discharged debt is a violation of federal law.