Bankruptcy 101–What is Bankruptcy?

Simply put, bankruptcy is the legal way to permanently eliminate most debts.  Bankruptcy is a federal process that is governed by federal laws enacted by Congress (the United States Bankruptcy Code), and is handled in specialized federal bankruptcy courts.  The Bankruptcy Code is a powerful set of laws that protect a person from their debts and creditors once they have asked the bankruptcy court for protection, and almost always results in a permanent order eliminating, or “discharging” most or all of a person’s debts.

To file or claim bankruptcy, a person must file a petition with the United States Bankruptcy Court for the federal district in which they live.  By filing this petition, they automatically are given very strong protections by bankruptcy laws that prohibit nearly all debts from taking any further action against that person while the bankruptcy is in process.  This set of protections is called the “automatic stay” and is in place until either the bankruptcy court issues an order removing the automatic stay, or the person’s debts are discharged.  There are strong penalties for a creditor that violates the automatic stay.  At the end of the bankruptcy process the bankruptcy court will almost always sign an order that declares the person’s debts to be discharged, or permanently eliminated.  The bankruptcy laws provide strong penalties for creditors that try to collect upon a debt that has been discharged.

Our modern system of bankruptcy laws is mandated in the constitution, which at Article I, Section 8, directs Congress to establish “uniform Laws on the subject of Bankruptcies . . .”  Congress in 1978 enacted the modern Bankruptcy Code.

It is very important that bankruptcy is mandated by the Constitution–this means that bankruptcy laws have supremacy over state laws so that we have a single set of bankruptcy laws all across the country.  This also means that bankruptcy laws have supremacy over state laws and even federal laws regarding debt.  This means that it is unquestionable that when a person files bankruptcy, they are protected by bankruptcy laws; creditors that don’t respect the bankruptcy protections can find themselves on the wrong end of a lawsuit.

The United States Bankruptcy Code provides important protections and debt relief to people.  If you have debt that is overwhelming you, make sure that you contact Prescott Pearson & Tande, PA to find out how you can be protected under the Bankruptcy Code.

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