Does Bankruptcy Protection Protect You for Being Sued & Wage Garnishment?
Filing for bankruptcy offers the most powerful protection available against debt collectors. Most people filing for bankruptcy are suffering from excessive debt, including delinquent credit card accounts and other loans placed for collection. Depending on the chapter, bankruptcy allows debtors to quickly eliminate debt or reorganize debt over several years. Bankruptcy also stops debt collectors from garnishing wages or filing debt lawsuits while the debtor completes bankruptcy.
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The Automatic Stay
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Many debtors are drawn to bankruptcy because of a special legal order in bankruptcy called "the automatic stay." The stay becomes effective the day the debtor files for bankruptcy. With the stay in place, all wage garnishment or debt lawsuits must stop. That protection is significant, because lawsuits and wage garnishment are a debt collector's most powerful weapons. Lawsuits in civil court can result in monetary judgments ordering a debtor to pay the full balance on a delinquent debt. If the debtor does not comply the judge in the case can order garnishment of the debtor's bank account or wages.
Compliance
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Bankruptcy is the most effective means for ending garnishment and debt lawsuits, although debtors can negotiate directly with debt collectors without filing for bankruptcy. Debt settlement allows debtors to resolve delinquent debts through voluntary agreements with debt collectors. "The New York TImes" reports that debt collectors sometimes settle delinquent debts for 20 to 70 percent of the balance. However, a debt collector holding a garnishment order may insist on the entire balance payable in installments in exchange for ending garnishment.
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Choices
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Debtors filing for bankruptcy usually choose one of two bankruptcy types — Chapter 7 or Chapter 13. Chapter 7 completely eliminates unsecured debts such as credit cards in just several months. Chapter 13 reorganizes debts over three to five years with the help of a court-managed payment plan. During that period a bankruptcy court trustee oversees the debtor's finances. The trustee places the debtor on a strict budget, with a goal of paying as much money to creditors as possible.
Considerations
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The Federal Trade Commission acknowledges that bankruptcy offers many benefits, including protection from wage garnishment and debt lawsuits. However, the FTC also points out that bankruptcy severely harms credit ratings. Bankruptcy information remains on credit reports for 10 years, making it difficult for a debtor to obtain new credit at competitive interest rates.
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