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 will stop collection actions that are already in process, including lawsuits, wage garnishment, foreclosure, repossession, evictions, and tax debt proceedings. It can also help you keep your utilities connected.
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.
Even if a collection suit has already been decided against you, the automatic stay can stop the effects. It will force all wage garnishment to stop. 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 get some of the wages garnished before you filed back. The automatic stay will also prevent creditors from levying your bank accounts.
There is an exception to the automatic stay’s power to stop wage garnishment. If your wages are being garnished to pay child or spousal support obligations, the automatic stay won’t stop it. That’s because child and spousal support debts aren’t dischargeable in bankruptcy and are considered to be outside the bankruptcy process.
Especially in the wake of the 2008 crisis, many debtors are underwater and behind on their mortgages and are worried about losing their homes. The automatic stay can help with that, too. When your home is foreclosed, it goes through a lengthy process that eventually leads to a sheriff’s sale. If you file a bankruptcy at any point before the home is actually sold, the automatic stay will stop the foreclosure proceeding. Even if you file on the day before the sale is scheduled, the automatic stay has you covered. The foreclosure will stop and your mortgage debt will become a part of the bankruptcy process to be dealt with through the 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.
Much like a foreclosure, the automatic stay will stop a repossession as long as the car or other repossessed property has not yet been sold. That means your car will be returned to you and your auto loan debt will be managed through the bankruptcy process. If you’re worried about losing your car, a bankruptcy filing can help.
As with other types of collection actions, the automatic stay can stop an eviction for nonpayment as long as the landlord hasn’t gotten a judgment against you. If your landlord already has a court judgment against you, the automatic stay won’t stop the eviction process. If your landlord does not yet have that judgment, the automatic stay will stop the eviction process. However, courts typically grant landlords’ requests for the stay to be lifted, meaning that you won’t be able to stay in your rental unit for long. In addition, the landlord can evict you if you are damaging the property, if she has reason to believe that you will damage the property, or if you’re using illegal substances on the property.
The automatic stay can help prevent some IRS actions related to tax debt. The IRS can still audit you and demand payment for back taxes. However, they won’t be able to place a tax lien on your property or seize any of your property or any portion of your income. You can deal with some or all of your tax debt through the bankruptcy process.
If you’re in danger of losing heat or power because you’re behind on your bills, the automatic stay will help keep you plugged in for at least 20 days.
Exceptions to the Automatic Stay
There are instances in which the automatic stay can’t help you. We mentioned a few above, such as wage garnishment for child or spousal support. In addition, the automatic stay won’t stop a criminal lawsuit in which you are a party. Finally, if you’ve taken a loan from your pension, the automatic stay won’t stop the pension from withholding part of your income to repay the loan.
You may also have limited protection if you’ve filed a bankruptcy case before. If you filed less than a year ago, you’ll only have the protection of the stay for 30 days after you file for the second time unless you petition the court to continue the stay beyond that time.
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.
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.