Protection from Creditors

• The reason most debtors file for bankruptcy is to obtain protection from creditors. The first step in this protection process is the issuance of the automatic stay. The automatic stay is the bankruptcy court's way of stepping in between you and your creditors. Under the protection of the stay, you no longer have to deal with your creditors trying to encourage you to pay. In fact, the stay makes such collection practices illegal. A creditor cannot so much as contact you until your bankruptcy case concludes. Once you place the resolution of your situation in the hands of the bankruptcy court, both you and your creditors must follow the orders of the court, which carry the force of law.
  
  

Orderly Distribution of Assets

• When you file Chapter 7 bankruptcy, you agree to turn over whatever assets the court deems "non-exempt" to your creditors as partial or full repayment of your debts. Once the creditors receive these payments, your debts are considered paid in full, and the court prohibits further collection activities. Bankruptcy exists to provide debtors this orderly distribution of assets, since you would not have the authority on your own to prevent your creditors from seeking additional payments.
  
  

Reorganization of Debts

• While Chapter 13 provides the same overall protection from creditors as Chapter 7, it generally provides for greater protection for creditors as well. Unlike a Chapter 7 bankruptcy, which can often result in creditors receiving nothing, a Chapter 13 bankruptcy ensures that at least some creditors will receive as many as five years of monthly payments. Chapter 13 bankruptcy exists to force debtors with a high enough regular income stream to turn over some of that income to creditors.
  
  

Fresh Start, With Penalties

• The underlying principle for all bankruptcies is that debtors who truly need help climbing out from under a pile of debt can receive it via the bankruptcy courts. If you are an honest debtor, you can usually qualify for at least some type of bankruptcy relief, either Chapter 7 or Chapter 13. However, in addition to the immediate financial ramifications of filing for bankruptcy, you must agree to the long-term consequences as well. Experian reports that the damaging notation of bankruptcy appears on your credit report for 10 years, if you choose to file Chapter 7, or seven years when filing Chapter 13. With this mark on your record, it could be difficult to get new credit for a long time.