Bankruptcy is a way for you to reorganize your finances. It’s a way for you to get out from under a crippling debt burden and start over. As part of that process, many of your debts will be wiped out. Of course, your creditors don’t want that to happen. They’re trying to collect as much as possible from you, as soon as possible. To prevent creditors from racing to collect from you when you file, and to ensure that all creditors are treated the same way through the bankruptcy court, bankruptcy law includes a provision for a powerful legal protection from your creditors: the automatic stay.
Legal Protection from Creditors
The automatic stay is one of the most powerful legal protections available to a debtor. To read the automatic stay law, click here. When you file a bankruptcy case, it kicks in automatically. What, exactly, does the automatic stay do?
Put simply, it forces your creditors to stop trying to collect from you for the duration of your bankruptcy case. That means they can’t call or send you letters. They can’t file collection lawsuits against you. They can’t repossess your car or foreclose on your home.
In addition to preventing creditors from starting new efforts to collect, the automatic stay can stop many collection actions that are already in process, including lawsuits, most wage garnishments, foreclosure proceedings, and many tax collection actions. It may also stop a repossession that has not yet happened or a sale of repossessed property that has not yet occurred, but whether a creditor must return property already repossessed can depend on additional bankruptcy procedures. Bankruptcy law may also help you keep your utilities connected, subject to separate rules about adequate assurance of future payment.
Collection Lawsuits
When a creditor files a collection lawsuit against you, it sets in motion a standard legal process. You’ll get notice of the lawsuit and have an opportunity to file an official legal Answer to the suit. Then a hearing will be scheduled and you and your creditor will go before the judge to explain your side of the case. The judge will make a decision, called a “judgment,” one way or the other. If the court decides against you, you’ll be legally ordered to pay up. If you can’t or won’t, your creditor will ask the court for the right to collect in other ways, such as bank levies or wage garnishment.
If you file a bankruptcy case before the court makes its judgment, the automatic stay will stop the lawsuit. That creditor will have to handle its claim against you through the bankruptcy court and the bankruptcy process.
Even if the lawsuit has already been decided and there’s a judgment against you, bankruptcy can help. If the judgment is for a debt that would ordinarily be dischargeable in bankruptcy, you can discharge the judgment debt, too.
Wage Garnishment
Even if a collection suit has already been decided against you, the automatic stay can often stop the effects. It will generally stop most wage garnishments for consumer debts. That can relieve a huge burden on debtors, especially those who face garnishment of large portions of their wages. In some cases, you may even be able to recover wages garnished shortly before you filed. The automatic stay can also stop many bank levies, although important exceptions apply.
There is an important exception to the automatic stay’s power to stop wage garnishment. If your wages are being withheld to pay domestic support obligations such as child support or spousal support, the automatic stay generally won’t stop it. Those obligations receive special treatment in bankruptcy.
Foreclosure
Many debtors who fall behind on their mortgages worry about losing their homes. The automatic stay can help with that, too. In California, many residential foreclosures proceed outside of court and end in a trustee’s sale. If you file bankruptcy before the foreclosure sale is completed, the automatic stay will usually stop the foreclosure proceeding. The foreclosure will pause and your mortgage debt will become part of the bankruptcy process to be addressed in bankruptcy court.
You will, of course, have to ensure that your attorney notifies your mortgage lender of your filing right away. If they sell it before they receive notice of the filing, the automatic stay can’t help you.
Repossession
Much like a foreclosure, the automatic stay can stop a repossession that has not yet happened and can stop the sale of repossessed property that has not yet been sold. But if a creditor already repossessed your car before you filed, bankruptcy does not necessarily require the creditor to return it immediately just because the case was filed. Getting the vehicle back may require additional action in the bankruptcy case. If you’re worried about losing your car, a bankruptcy filing may still help, but timing matters.
Evictions
As with other types of collection actions, the automatic stay can often stop an eviction for nonpayment if the landlord has not yet obtained a judgment for possession. If the landlord already has a judgment for possession, the stay generally will not stop the eviction. There is, however, a narrow exception: in some circumstances a tenant can obtain a temporary 30-day stay by filing the required certification with the petition, depositing rent with the court, and then curing the full monetary default within that period if state law allows it. There is also a separate exception for certain evictions based on endangerment of the property or illegal use of controlled substances. Even when the stay initially applies, landlords can ask the court for relief from the stay.
Tax Debts
The automatic stay can help prevent many IRS collection actions related to tax debt, but it does not stop everything. The IRS can still audit you, issue a notice of tax deficiency, demand tax returns, assess tax, and send a notice and demand for payment. In general, the stay still stops new levies and many other collection actions, and a tax lien generally will not attach to property of the estate merely because of an assessment while that property remains in the estate. You may be able to deal with some of your tax debt through the bankruptcy process.
Utilities
If you’re in danger of losing heat or power because you’re behind on your bills, bankruptcy law may help keep your utility service in place for at least 20 days in many consumer cases. But you may need to provide adequate assurance of future payment, such as a deposit or other security, to keep service from being discontinued after that period.
Exceptions to the Automatic Stay
There are instances in which the automatic stay can’t help you. We mentioned a few above, such as collection of domestic support obligations in certain circumstances. In addition, the automatic stay generally does not stop criminal actions or proceedings against you. And if you’ve taken a loan from a qualifying retirement plan, the automatic stay usually will not stop payroll deductions used to repay that loan.
You may also have limited protection if you’ve filed bankruptcy cases that were pending and dismissed within the previous year. If one prior case was pending and dismissed within that period, the automatic stay generally ends 30 days after the new filing unless the court extends it. If two or more prior cases were pending and dismissed within the previous year, the automatic stay generally does not go into effect at all unless the court imposes it.
Lifting the Stay
While the automatic stay offers you serious protection, it doesn’t leave creditors without recourse. Your creditors have the right to petition the court to lift the automatic stay. If granted, the automatic stay will no longer apply to that creditor and they’ll be able to pursue whatever collection actions they choose. The automatic stay is likely to be granted if it’s not serving any purpose but delay. For example, if you’ve never made a payment on your car and have no assets with which to pay, the court is likely to grant your auto lender’s request for relief from the stay.
Expert Help
If you’re in need of protection from the automatic stay and considering a bankruptcy, reach out to one of our experienced personal bankruptcy attorneys. In a free consultation, we’ll go over your case and help you understand your options. We’ll work with you to find a solution that works for you.