There are many situations where Americans may encounter financial struggles, and they may be unable to pay certain bills due to issues such as the loss of a job. However, missed payments can have consequences, and if a person defaults on their auto loan, the lender may repossess the car. In situations where a debtor is facing a potential repossession or where a lender has already taken possession of the vehicle, bankruptcy may be an option that will allow them to stop the repossession process.

Filing for Bankruptcy Before a Repossession Takes Place

In cases where a person has failed to make payments on an auto loan, bankruptcy can offer some protection against repossession. After filing a bankruptcy petition, an automatic stay is put in place. This means that creditors are prohibited from taking any collection action, including repossession. The automatic stay will remain in effect until the bankruptcy case is concluded.

For anyone who owns a home, the possibility of foreclosure may be a concern. A homeowner who experiences financial difficulties such as the loss of a job may be unable to make mortgage payments. Late payments may result in fees and penalties, and a homeowner may struggle to make up what is owed while continuing to make ongoing payments and covering other expenses. When a loan is in default, a lender may begin foreclosure proceedings, and this could result in the loss of the home. In these situations, homeowners will need to understand their options and determine the best ways to proceed.

Bankruptcy and Other Foreclosure Defense Options

In many cases, filing for bankruptcy is a good first step that will stop a lender from proceeding with a foreclosure. After a bankruptcy petition is filed, a “stay” will automatically be put in place by the bankruptcy court that will force creditors to cease all debt collection actions, including foreclosure proceedings, repossession of property, or wage garnishment. The debtor can then determine whether Chapter 7 or Chapter 13 bankruptcy will allow them to eliminate certain debts, become current on their mortgage, and avoid the loss of their home.

As an alternative to bankruptcy, a homeowner may be able to contact their mortgage lender and determine whether loan modifications may be made. Depending on the debtor’s circumstances, a lender may agree to a forbearance in which a person may not be required to make payments for a certain period of time, and these payments may be added on to the end of the loan. A lender may agree to add the missed payments and fees to the principal of the loan (known as “capitalization of arrears”), or other adjustments may be made, such as lowering the interest rate. By reaching agreements with a lender, a homeowner may be able to find affordable solutions that will allow them to continue making mortgage payments and avoid foreclosure.

People who are looking to get out of debt may be unsure about their options for filing for bankruptcy, but by consulting with an attorney, they can determine the best methods for eliminating debts, reducing the amounts they owe, and avoiding issues such as foreclosure. Many people are unaware of the benefits they may be able to receive by filing for bankruptcy, which may include the reduction of the amounts they owe on certain loans. A bankruptcy lawyer can help determine whether techniques known as “cramdowns” or “lien stripping” may be used to address home mortgages, auto loans, or other debts.

Reducing and Reclassifying Debts During Chapter 13 Bankruptcy

The approach to different types of debts may differ depending on the type of bankruptcy a person pursues. While Chapter 7 bankruptcy will allow for the elimination of most debts, this could result in the loss of certain assets, including through the repossession of a vehicle or a home foreclosure. For those who are looking to maintain ownership of their assets, Chapter 13 bankruptcy may be the preferred option.

In a Chapter 13 case, a debtor will propose a repayment plan in which monthly payments will be made toward certain debts over several years. In addition to paying some of what is owed toward unsecured debts (such as credit cards or medical bills), missed payments toward secured debts (such as a home mortgage or auto loan) may be made up through the repayment plan. When creating a repayment plan, some secured debts may be reduced, or they may be reclassified as unsecured debts.

If you owe significant debts, creditor harassment can be a problem. Creditors may repeatedly call you or send notices through mail, email, or other methods, and they may threaten to take your property, file lawsuits, or even pursue criminal charges. As you determine your options for debt relief, it is important to understand your rights, the steps you can take to respond to communication from creditors, and how filing for bankruptcy may help your situation.

Your Rights Under the Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the types of actions that creditors can take when collecting debts, and it also provides consumers with options for limiting contact with creditors and requiring them to stop certain actions. Under the FDCPA, creditors have restrictions on the types of communication that are allowed with debtors. They are generally prohibited from contacting you at unusual times, such as after 9:00 p.m., and they cannot attempt to contact you more than once per day. 

While creditors can contact you through multiple methods, such as calling you at work, they are required to stop doing so if requested. In fact, you can request that they cease all communication with you by submitting a written request. This will not stop them from taking actions to collect debts, such as by filing a lawsuit, but it can stop them from calling or otherwise contacting you while you determine how to address the debts that are owed. You can also request a validation of your debts, and in these cases, a creditor must send you a validation letter that states the name of the creditor, the amount owed, and information about disputing the debt.

Nearly everyone has debts, and while some may be able to manage these issues successfully, others may have experienced significant financial difficulties that have affected their ability to repay what is owed while also addressing their ongoing living expenses. People in this situation may be regularly receiving calls or letters from creditors, and they may be worried that they could lose their home or other property, face lawsuits, or have their bank accounts seized or their wages garnished. Unfortunately, many people are hesitant to consider bankruptcy in these cases due to some common misconceptions about this form of debt relief. By understanding when bankruptcy may be used and the processes that are followed, a debtor can determine whether this option is right for them.

Busting Bankruptcy Myths

Some common misconceptions about bankruptcy include:

• Myth: Bankruptcy is mostly used by people who have been irresponsible with money - There are a multitude of reasons why people experience overwhelming debt, and in many cases, these situations occur unexpectedly with little or no chance to prepare. In fact, the majority of bankruptcy cases involve medical debt. Even if a person has insurance, a serious illness or major injury can result in massive medical bills that a family may have no chance of paying. An unexpected layoff or other issues that affect a person’s income can also lead to significant financial difficulties, making it hard for a family to pay bills. Everyone has the right to file for bankruptcy and receive relief from their debts, and there should be no shame in seeking out help when a family struggles with financial problems.

  ...