Understanding Bankruptcy
Though people in economic trouble may be aware that they have options involving bankruptcy, they may be unsure exactly what bankruptcy is and what the purposes of the bankruptcy process are.
What is Bankruptcy?
Bankruptcy is a procedure where a court gives certain protections to people so they can reorganize their finances, get rid of debts they cannot afford to pay, and take the time to pay back debts they can afford.
At John T. Turco & Associates, we help people in Nebraska and Iowa file for bankruptcy, but perhaps more importantly, we help them understand their options and make informed decisions.
Example of How Bankruptcy Works
To explain what bankruptcy is and how it works, it is easier to imagine that you are the creditor (the person or company that is owed money by you).
Let’s say that you are a fictional local Omaha creditor by the name of Omaha Medical Center, Inc. and your hospital provided Mr. Bill Jones with medical services from a recent bicycle accident, including extensive surgery to reconstruct his right leg. Bill is a single person and lives in an apartment in Omaha and works as a truck driver for a local distribution company.
Bill earns, on average, about $25,000 per year but has a lot of debts including a $400 per month car payment, monthly rent at $700 and medical bills totaling $27,000, mainly from the bicycle accident. Bill was medically uninsured when he had the accident and has no savings.
About 4 months after the accident, he starting getting collection calls about his medical bills and has been threatened to either pay his bill or face a lawsuit and garnishment at his place of employment. Last month, Bill was actually sued by an Omaha based collection agency and a judgment was obtained against him and a garnishment was sent to his employer.
Bill then decides to look into his options and finds out that he qualifies to file for bankruptcy in Nebraska. Let’s now fast forward about 4 months and assume that Bill went through the process of filing a Chapter 7 bankruptcy, and his case was officially approved by the Bankruptcy Court here in Omaha, Nebraska. In fact, Bill just receives a final letter from his bankruptcy lawyer telling him that everything went very well and that he no longer needs to worry about his bills.
So, what does Bill’s medical bankruptcy mean to Omaha Medical Center, Inc.? It means this:
- Omaha Medical Center received a document in the mail that orders it never to contact Bill again regarding this debt. This document is commonly referred to as a Discharge Order and is issued by a federal bankruptcy court. Even organizations such as the Internal Revenue Service and the Department of Education must obey such an order.
- Omaha Medical Center will not be paid by the government nor be paid by any other entity. The bottom line is that Omaha Medical Center simply cannot do anything to collect the debt.
- Omaha Medical Center may not send this uncollected debt to a collection agency nor may it even send a “nice” letter to Bill asking him to voluntarily pay it.
From this simple example, you can see that a bankruptcy is ultimately just a court order that commands the creditor to stop all collection efforts forever! If the creditor foolishly decides to disobey this order, then they can and will be held in contempt of court resulting in punishment of some sort, including payment of a fine or, in extreme cases, imprisonment of the responsible party.
Now that we know what the end result or objective of a bankruptcy is (a court order to the creditors to stop collecting forever), the next thing to discuss is how does a person qualify for bankruptcy?
Bankruptcy History: A Better Option for Encouraging Investment and Growth
In old England, there were no bankruptcy laws. Instead, there were debtors’ prisons. People who could not pay their debts were thrown in jail. When our founders set up a new, independent system of government in America, they decided that this was no way to do things.
The United States Constitution gives Congress the authority to establish bankruptcy courts, recognizing the importance the founders placed on bankruptcy protection.
Economic progress is based on people’s willingness to take risks and invest in opportunities that might or might not work out. The founders wisely anticipated that people would be more willing to take risks knowing that bankruptcy protection was available, and the benefits of economic growth would outweigh the cost to some creditors.
Considering Moral Questions About Bankruptcy
Many people ask whether bankruptcy is immoral if it means that you are not paying back all of your debts. Everyone has their own moral beliefs, but you should consider your beliefs in light of the specific position you are in.
The bankruptcy laws are not designed for people who can afford to pay their debts and just don’t want to. They are designed for people who had every intention of paying their debts when they signed up for them but now find themselves unable to do so. If the money isn’t there, you can’t pay it back.
We would be happy to talk to you further about the history of bankruptcy, the importance of bankruptcy protection and what type of bankruptcy you qualify for.
We can help. Contact us to speak to one of our experienced bankruptcy lawyers or to arrange a free initial consultation. If you cannot come to our Omaha offices, we can consult with you by telephone.