What is a Bankruptcy Automatic Stay?

Most people file for bankruptcy because they want to save their home or car from being taken, or they need to stop debt-collection lawsuits. Some people file Chapter 7 or Chapter 13 to stop debt collectors from calling. Others may want to stop creditors from seizing their property or garnishing their wages. The common factor in why people file for bankruptcy is that they have debts they cannot afford. They need a fresh start because they experienced a life event or hardship that caused a financial crisis. Without the help of the bankruptcy court, they cannot get back on their feet to recover and rebuild. The bankruptcy automatic stay is a key part of the process.

Bankruptcy Laws Give Debtors a Fresh Start Without the Burden of Debt

According to the United States Courts, a primary reason for the bankruptcy code was to give debtors a “fresh start” from debts they could not afford to pay. In Local Loan vs. Hunt (1934), the United States Supreme Court held that bankruptcy helped “honest but unfortunate” debtors. The bankruptcy process gave them a new opportunity in life and a clear field for future effort. Moreover, it did so without the pressure and discouragement of preexisting debt.

The bankruptcy discharge is the tool used to give a debtor the “fresh start” offered through the bankruptcy process. Once the bankruptcy court discharges a debt, creditors cannot take any legal action to collect the debt.

Creditors cannot garnish your wages or sue you in court to collect a discharged debt. The law prohibits debt collectors from harassing you or threatening you to get you to pay a discharged debt. The court can punish creditors and debt collectors who break the law. In some situations, a person might receive compensation for damages if the illegal collection of a discharged debt caused them harm.

However, what prevents creditors from trying to seize your assets and income until the court grants the bankruptcy discharge?

The Bankruptcy Automatic Stay Protects You From Creditors

The bankruptcy court does not issue your bankruptcy discharge until your case is ready to close. Therefore, Congress included the automatic stay in the Bankruptcy Code to protect debtors from creditors while the bankruptcy court is pending.

The automatic stay prevents creditors from taking specific actions once a person files a bankruptcy petition. The automatic stay remains in effect until a court order modifies it or the case closes. Section 362 of the Bankruptcy Code explains what types of actions are stayed by filing the Chapter 7 or Chapter 13 bankruptcy petition.

Actions that the automatic stay prohibits include, but are not limited to:

Beginning or continuing any court action to collect a debt (i.e., debt collection lawsuits)
Seizing assets that are part of the bankruptcy estate, including repossessions, foreclosures, levies, wage garnishments, etc.
Contacting you to demand payment of debts, although the creditor or debt collection may send a statement of the amount on the account as long as the statement does not demand payment of the debt
Debt collectors and creditors should stop calling you once you tell them you filed a bankruptcy case and give them your case number

The bankruptcy court sends notices to all creditors on your bankruptcy forms. However, it could take some time for the creditors to receive and process the notice. Therefore, keep your bankruptcy number near your phone.

If a creditor calls, tell them you filed for bankruptcy and give them the case number and filing date. If you have a lawyer, give them your lawyer’s name and telephone number. You are not required to discuss your case or answer any questions for the creditor. It is best to refer them to your bankruptcy attorney.

Some Debts May Not Be Subject to the Bankruptcy Automatic Stay

If you owe domestic support payments (i.e., alimony or child support), the automatic stay does not prevent the family court from continuing proceedings for non-payment.

However, if you file under Chapter 13, you can include past-due support payments in your Chapter 13 plan. If you immediately resume timely support payments, filing a Chapter 13 bankruptcy could stop further actions to collect the back support payments.

The automatic stay may not stop some government actions, such as an Internal Revenue Service Audit. However, the automatic stay stops the IRS from issuing a tax lien or freezing property without bankruptcy court approval.

The automatic stay does not stop criminal proceedings. For example, if a criminal court sentenced you to pay a fine or serve community service for writing bad checks, the automatic stay does not stop the criminal court from carrying out the punishment.

The Court May Terminate the Bankruptcy Automatic Stay in Some Cases

In some cases, the automatic stay might not go into effect immediately after you file a Chapter 7 or Chapter 13 case. For example, if you had another bankruptcy case pending within the past year, the automatic stay terminates after 30 days unless you petition the court before the stay expires. You have the burden of showing that you filed your current case in good faith for the court to extend the automatic stay.

A creditor may file a motion to modify the automatic stay to permit the creditor to continue a foreclosure or repossession action. Generally, the court grants motions to modify the stay when the debtor cannot show adequate protection in a Chapter 13 bankruptcy plan to protect the creditor’s interest in the collateral.

In a Chapter 7 case, the debtor would need to pay the loan in full to stop the creditor from proceeding with a foreclosure or repossession. However, filing Chapter 7 can stall a foreclosure or repossession for at least a month or more while the creditor prepares and files the motion.

The Automatic Stay Only Delays Some Actions

An automatic stay can prevent you from being evicted from your home, but only in some instances and for a short while. If the creditor received an eviction order before you filed your bankruptcy case, the creditor might proceed with the eviction.

The landlord may file a motion to modify with the court. The creditor asks the court to lift the automatic stay. If you filed Chapter 7 and cannot afford to pay the past due rent payments, the court will likely lift the stay to allow the eviction. However, you might be able to include the past due rent payments in the Chapter 13 plan if the lease term does not exceed the term of the Chapter 13 plan.

What Happens If a Creditor Violates the Automatic Stay?

The court could hold the creditor accountable for violating the automatic stay. In addition, the court may issue sanctions against the creditor for the violation. Sanctions could include fines, attorneys’ fees, and damages for actual losses.

A bankruptcy lawyer can help you determine what steps you should take to hold a creditor accountable for violations of the automatic stay. If you filed for bankruptcy without an attorney, you might send a letter to the judge or the court clerk requesting assistance.

Contact Ascend Today for More Information

At Ascend, we work with individuals to find a way to eliminate debts as quickly as possible. We have numerous free tools we encourage you to use. Tools available on our website free of charge include:

We also have a vast library of free debt-relief and bankruptcy articles for your use. We continue to add more information and tools for consumers to use as they search for the best way to get rid of debts. Our sincere desire is to help you get out of debt.

Call (833) 272-3631 or reach out to us online to speak with a member of our team. The call and consultation are at no cost to you.