How Bankruptcy Helps

August 6, 2017

How Bankruptcy Helps

    Debt can destroy financial freedom. Revolving credit charges compound interest. And when illness or loss of employment is added to that burden, a person can easily fall behind in her monthly payments. Creditors then hound the borrower through a collection agency, after which they sue the borrower.

    Bankruptcy halts all that collection activity. Chapter 7 bankruptcy can free a person from having to repay such lenders as a credit-card company or a department store. Lawsuits to recover credit-card debt are stayed, wage garnishment ends, a frozen bank account is unfrozen, and debt collectors are prevented from dunning the borrower.

    And bankruptcy can provide a clean financial slate. The borrower can learn to manage debt, get back on her feet financially, and replace her blemished credit record with a history of responsible credit use.

    Many people fear bankruptcy because they believe that it cuts off access to credit. That is often untrue. For one thing, a person whose credit report shows that lenders that are not receiving their monthly debt service, cannot obtain new credit. After bankruptcy eliminates those creditors, that person may be more rather than less, attractive to lend to.

    Also, a person who has gone bankrupt cannot do so again for a number of years. Because such a person cannot avoid repaying her debt through bankruptcy, a lender may consider her a good credit risk.

    Finally, although bankruptcy stays on a person’s credit report for ten years and often lowers her credit rating, someone emerging from bankruptcy may qualify for credit if it is collateralized, as with a home or car loan. The lender will charge more interest than it would charge a borrower who had not recently declared bankruptcy, but credit will be available. As for unsecured credit, a lender will usually issue a credit card to someone emerging from bankruptcy if the credit line is collateralized by a bank account. In about a year, the lender will usually increase the credit line without the borrower’s having to post more collateral, as long ass she has made her monthly payments on time.


Chapter 7 Bankruptcy Ends Creditors’ Dunning Calls and Letters

    A family that is already under a burden of excessive debt and, possibly, illness or unemployment, does not need harassing phone calls and letters to remind it of its financial difficulties.

    Bankruptcy stops those -collection activities. A creditor may not contact a borrower who has filed for bankruptcy, but must communicate with her through her attorney. And a creditor who violates that ban can be sued by the borrower for money damages. Also, bankruptcy stays a collection lawsuit Then when the debt that gave rise to the collection suit is discharged (that is, eliminated) by bankruptcy, the collection suit is dismissed.

Chapter 7 Bankruptcy Stops Wage Garnishment

    Chapter 7 bankruptcy assists a wage earner by stopping wage garnishment. Immediately after a bankruptcy filing the borrower resumes receiving her full paycheck, with the garnished amount no longer deducted from it.


Chapter 7 Bankruptcy Reopens a Frozen Bank Account

    A creditor that has a judgment against a borrower may freeze the borrower’s bank account. Often the borrower is unaware that that has happened until one of her checks bounces.

    Chapter 7 bankruptcy reopens a frozen bank account. It typically takes one to two weeks to obtain a court order unblock the account, and then to have the bank carry out the order.

    Additional borrower protection is provided by New York’s Exempt Income Protection Act, which prevents a bank from freezing a bank deposit of less than $2,100. That means that a depositor can require a bank to release the part of an account’s balance that is under $2,100.

    Thus, bankruptcy is not a disaster, but a way to eliminate financial problems and make a fresh start. A borrower who feels that she is overextended may contact attorney Stephen A. Katz at (212) 349-6400. He will provide a free consultation, in which he will review the borrower’s financial situation to determine with her, whether bankruptcy is her best option.