Ipso facto literally means "by that very fact" in Latin. It is an extremely important concept in Bankruptcy which if not recognized and enforced, could undermine the very protection of Bankruptcy itself.
Contracts including many mortgages are littered with clauses essentially attempting to prohibit people from filing bankruptcy. People who read the fine print of their car or house contract often come running in saying that the contract can be cancelled if they file. We have to assure them that a contract cannot give away your statutory right to file for bankruptcy protection. Those provisions are called ipso facto clauses because the bankruptcy itself is the cause of the alleged default - and they are impermissible under federal bankruptcy law and established case law throughout the country.
Generally, a contract cannot be made which is void as against public policy. United States aw grants individuals and other legal entities the right to file for bankruptcy protection. To protect that right, 11 U.S.C. (The Bankruptcy Code) sec. 365(e) explicitly prohibits a party to a contract from being penalized solely for the filing of the Bankruptcy itself. While certainly a creditor would not have to extend new or additional credit to someone who has filed for bankruptcy (thus credit cards can be cancelled) the existing contract or lease cannot simply be terminated as a result of the filing. A bankruptcy debtor can continue to make his or her car payments, rent payments or mortgage payments without risk of default simply because they have filed for bankruptcy protection.
If a mortgage or car loan could be deemed in default or the rate of interest doubled simply because of the bankruptcy filing, it would diminish if not eliminate any real relief for bankruptcy debtors. Many individuals would not be able to file at all for risk of losing their home or car, or being evicted. Thus, the principle that such ipso facto clauses are invalid is enshrined into the bankruptcy tenets.
This right to file bankruptcy and protection from such draconian results is only as strong as the bankruptcy debtor's ability to enforce. We have seen over recent years an ever increasing effort by creditors to utilize such ipso facto clauses as justification for any number of inappropriate actions against Debtors. These attempts are often directed against the most vulnerable who may not be sufficiently aware to even notify their counsel - or against those with no counsel at all. Thus, our continuing assertion and long proved truth that those who proceed into Bankruptcy Court without competent and knowledgeable counsel in this specific area of the law do so at their extreme peril. Even with counsel, one must be diligent in reviewing correspondence and other communications from their creditors or others as to potential impact from the bankruptcy filing. If it does not look right, call your lawyer right away.