You may be surprised to find out that as far back as the formation of the United States of America, the Federal government had the foresight to enact a set of rules and relief to help those people and businesses who could not pay back their creditors, found in the United States Constitution (in Article1, Section8). Our forefathers did not want to have debtor prisons like they did back in England. They accomplished this goal by allowing the Congress to enact "uniform laws on the subject of Bankruptcies throughout the United States" Each state now has its own set of state laws regarding relief of debt, which is guided by Title 11 of the United States Code. These laws and offshoots of them can now be found in many other sections of the law including Criminal laws, the IRS Tax Code (Title 26) and even the housing courts in ways to stop foreclosures from occurring.
Elements of the US Bankruptcy Laws:
Once a bankruptcy case is filed, the Federal statutes kick in and create an estate that controls all of the property and interests, and some future interests such as inheritances within 6 months of filing a bankrutpcy case of the filer. The most important part of these laws is that this estate is given special protection and no creditor can try to collect against it. In the most simplistic terms, no one can move forward on a law suit, a foreclosure or even collection of a tax levy during a bankruptcy case, without exclusive permission of the court.
The bankruptcy laws also dictate what property can be retained after a case is filed. Usually, someone who files a case does not have much property that would not be protected, especially because things with high values such as a home, car, boat, etc., typically have liens against them and not much equity. It should be noted that in Massachusetts for example, a homeowner can protect up to $500,000 of equity in their home. To learn more about what might be protected in your State, contact a local bankruptcy lawyer to inquire.
After a case is fully administered a Federal Judge will issue an Court Order that states all unsecured debt will be forgiven and no creditor can try to sue for money damages due to their inability to collect. This Court Order is called a “discharge of debt”. The discharge also does not eliminate certain rights of a creditor to setoff/offset certain mutual debts owed by co-debtors.
It should be noted that not every debt may be discharged. Certain taxes owed to Federal, state or local government, government guaranteed student loans, and child support obligations are not dischargeable.
Once you receive a discharge of debt, you can then get a fresh start on your finances. With this in mind, even today in the 21st century, it is amazing to think that way back during the formation of our country, these protections and laws were conceived of and are so important today.