The Automatic Stay
One of the most powerful remedies in the bankruptcy code, and one of the main benefits of filing for bankruptcy, is the automatic stay. The minute that your bankruptcy petition is filed with the court, the automatic stay goes into effect. The automatic stay is an immediate court order that prevents all creditors from continuing or initiating any efforts to collect from a debtor. The automatic stay can stop a foreclosure, even if the debtor files for bankruptcy the night before the foreclosure sale. The automatic stay also halts repossessions, attachments, wage garnishments, phone calls, letters, billing notices, and other attempts to collect debts.
A creditor must seek permission from the court to continue efforts to collect, and this is only granted in special circumstances, such as where the debtor’s mortgaged house has no equity. There are serious sanctions for creditors who violate the automatic stay by trying to collect from a debtor that has filed for bankruptcy. As a result, for unsecured creditors, the granting of the automatic stay is usually the end of all collection efforts.
Secured creditors generally will only seek relief from the automatic stay when the debtor is not going to continue paying its debt, such as for someone that files a Chapter 7 to stop a foreclosure. In this situation, the bankruptcy filing temporarily stays the foreclosure, and cannot permanently stop it. However, this may provide the debtor enough time to get caught up on the mortgage or come up with an alternative solution. An additional benefit for a chapter 13 filer, is that a person who is a co-debtor with the filer but does not file for bankruptcy (usually a spouse of the filer) gets the benefit of the automatic stay.
How Bankruptcy Stops Your Creditors: The Automatic Stay
After you file for bankruptcy, the automatic stay offers potent legal protection against bill collectors.
When you file for bankruptcy, something called the automatic stay immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. Especially if you are at risk of being evicted, being foreclosed on, being found in contempt for failure to pay child support, or losing such basic resources as utility services, welfare, unemployment benefits, or your job (because of a raft of wage garnishments), the automatic stay may provide a powerful reason to file for bankruptcy.
What the Automatic Stay Can Prevent
Here is how the automatic stay affects some common emergencies:
- Utility disconnections. If you’re behind on a utility bill and the company is threatening to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent the disconnection for at least 20 days. Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff in January in New England might be justification enough.
- Foreclosure. If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is usually a better remedy than Chapter 7 bankruptcy, if you want to keep your house.
- Eviction. If you are being evicted from your home, the automatic stay may provide some help — but the new bankruptcy law makes it easier for landlords to proceed with evictions. If your landlord already has a judgment of possession against you when you file, the automatic stay won’t affect these eviction proceedings; the landlord can continue just as if you hadn’t filed for bankruptcy. And if the landlord alleges that you’ve been endangering the property or using controlled substances there, the automatic stay won’t do you much good, either. In other cases, the automatic stay might buy you a few days or weeks, but the landlord will probably ask the court to lift the stay and allow the eviction — and the court will probably agree to do so. But it may buy you enough time to negotiate a deal with your landlord, and eliminating all your other debt in bankruptcy may free up enough income for you to make an affordable repayment plan with your landlord.
- Collection of overpayments of public benefits. If you received public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks. The automatic stay prevents this collection. However, if you become ineligible for benefits, the automatic stay doesn’t prevent the agency from denying or terminating benefits for that reason.
- Wage garnishments. Filing for bankruptcy stops wage attachments and garnishments dead in their tracks. (And not only will you take home your full salary again, but you also may be able to discharge the debt in bankruptcy.) Although no more than 25% of your wages may be taken to satisfy court judgments (up to 50% for child support and alimony), many people file for bankruptcy if more than one wage garnishment is threatened.
What the Automatic Stay Cannot Prevent
In a few instances, the automatic stay won’t help you.
- Certain tax proceedings. The IRS can still audit you, issue tax deficiency notices, demand the filing of a tax return, issue tax assessments, or demand payment of such an assessment. However, the automatic stay does stop the IRS from issuing a tax lien or seizing your property or income.
- Support actions. A lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or alimony isn’t stopped by your filing for bankruptcy.
- Criminal proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component won’t be stopped by the automatic stay. For example, if you were convicted of writing a bad check, sentenced to community service, and ordered to pay a fine, your obligation to do community service or pay the fine won’t be stopped by your filing for bankruptcy.
- Loans from a pension fund. Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of qualified retirement funds (including most job-related 401(k) plans).
- Multiple filings. If you had a bankruptcy case pending during the previous year, then the stay will automatically terminate after 30 days unless you, the trustee, the U.S. Trustee, or a creditor asks for the stay to continue and proves that the current case was filed in good faith. If a creditor had a motion to lift the stay pending during the previous case, the court will presume that you acted in bad faith, and you’ll have to overcome this presumption to get the protection of the stay in your current case.
Can Creditors Get Around the Automatic Stay
If a creditor qualifies, a creditor may ask the bankruptcy court to “lift” the automatic stay, if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can’t pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to go to court soon after you file for bankruptcy and ask for permission to proceed with the foreclosure — and in those circumstances, that permission is likely to be granted.
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