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How bankruptcy can impact credit card debts

On Behalf of | Aug 29, 2019 | Credit Card Debt

Many people in Chattanooga and Eastern Tennessee who wonder about filing a petition for bankruptcy are struggling under a mountain of credit card debt. They may have heard that bankruptcy offers protection from credit card companies that are trying to collect on these delinquent accounts, but they don’t understand the process and may be skeptical about whether a bankruptcy petition will offer any protection. Any question about bankruptcy can be answered only with reference to the specific financial situation of any given person. But, a bankruptcy petition will bring all collection actions to a stop until the bankruptcy proceeding is complete. This is known as the “automatic stay.”

Bankruptcy is intended to give financial relief to people who cannot manage their debts. The automatic stay is instrumental to achieving this end. When a petition for bankruptcy is filed under Chapter 7, Chapter 11 or Chapter 13, the court where the petition is filed issues an order to all creditors identified by the person who filed the petition directing that all collection proceedings stop immediately.

The order is called a “stay” because it stops – or “stays” – collection actions. The effect of the stay is not limited to pending court actions. It also applies to collection proceedings, such as the mailing of demand letters, garnishment of wages and collection phone calls. If a creditor should violate the stay by continuing efforts to collect the debt, it may face contempt proceedings or other penalties imposed by the court.

The stay remains in effect until the bankruptcy proceeding is concluded. The debtor can use this time to negotiate with the creditors about reducing the amount needed to pay the debt or extending the deadline for payment. If the debtor has filed a Chapter 7 petition, all of the credit card debts may be discharged. If the debtor has filed a Chapter 11 or Chapter 13 petition, the final order will embody any agreements reached by the debtor and one or more creditors.