HOW THE "AUTOMATIC STAY" IN BANKRUPTCY PROTECTS YOU FROM CREDITORS
Whether you file for a petition for relief under chapter 7 or chapter 13 , the Bankruptcy Code will immediately protect you from most collection efforts in civil lawsuits filed against you by a creditor, collection agency, or government agency. This protection begins on the same day your case is filed with the Court. This form of protection from creditors is known as the “automatic stay” and is provided by Section 362 of the Bankruptcy Code.
Filing a bankruptcy petition can temporarily—and sometimes permanently—help if you're at risk of being evicted, being foreclosed on, or losing such essential resources as utility services or a portion of your paycheck through wage garnishment.
During your bankruptcy case, creditors will be unable to take any and all collection actions against you, including contacting you, billing you, suing you, foreclosing or repossessing your car or home, or taking actions to enforce any court ordered judgments that a creditor may have received against you (i.e. garnishing your paychecks or bank accounts).
Here's 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, it might make sense to file if you have other debt that you can discharge. Be aware that the utility company will most likely require that you pay an additional deposit to ensure future payment.
Foreclosure. If your home is being foreclosed on, the automatic stay will stop the proceedings. What will happen next, however, depends on the type of bankruptcy petition you file. If you want to keep your home, Chapter 13 bankruptcy is usually a better remedy because you can catch up back payments in a three- to five-year repayment plan. Chapter 7 bankruptcy doesn't have a mechanism that will allow you to retain your home if you're behind, so the relief provided by the stay will be temporary.
Eviction. If you're being evicted from your home, the automatic stay might provide some help, but it's usually temporary. 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.
Collection of overpayment of public benefits. If you receive public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks, or, if you no longer receive benefits, from you directly. 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.
Multiple wage garnishments. Filing for bankruptcy stops most garnishments dead in their tracks. Not only will you take home a full salary, but you also will be able to discharge qualifying debt—such as credit card balances and personal loans—in bankruptcy. Be aware that commonly garnished debts, such as for ongoing child support and alimony, won't get discharged. What will happen to overdue support payments and back taxes will depend on the bankruptcy chapter that you file. (You'll likely remain responsible after a Chapter 7 bankruptcy and pay off the debt entirely in a Chapter 13 bankruptcy.)
EXCEPTIONS TO THE AUTOMATIC STAY
Here are some types of collection actions the automatic stay cannot prevent:
Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does temporarily stop the IRS from issuing a tax lien or seizing your property or income. Whether you'll be responsible for the tax after your bankruptcy will depend on whether the tax gets discharged in Chapter 7 bankruptcy or whether you pay the debt in Chapter 13 bankruptcy.
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 won't be stopped by the automatic stay. For instance, 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 won't be stopped by your filing for bankruptcy—and if the fine was assessed as a punishment, you'll be required to pay it, as well.
Loans from a pension. Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions and IRAs).
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.
WHY THE COURT MIGHT LIFT THE STAY FOR SOME CREDITORS
There are also some circumstances where creditors may seek a court order to “lift the automatic stay,” and allow them to either pursue collection of the debt or foreclosure/repossession of the collateral that secured by that debt.
Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove ("lift") the stay. To avoid fines and penalties for a violation of the automatic stay, the creditor must first file a motion seeking permission from the Court to continue with collection efforts.
Motions to lift the automatic stay commonly involve the following – (a) foreclosure action, (b) landlord/tenant dispute, and (c) a pending lawsuit in another court.
The creditor must show the Bankruptcy Court Judge that keeping the automatic stay in place will cause the creditor to lose money and provide no financial benefit or harm to other creditors.
As an example, suppose that you file for bankruptcy the day before your house is to be sold in foreclosure and the facts are as follows:
You don't have any equity in the house.
You can't catch up and pay your mortgage arrears.
The foreclosing creditor will most likely get in front of the Court soon after you file your bankruptcy petition and ask for permission to proceed with the foreclosure. The basis for the motion will be that when taking out the mortgage, you put up a home as collateral, thereby giving the lender a lien that allows it to recover the home through foreclosure if you, the borrower, defaults on the agreement, such as by failing to make timely payments. With this type of debt—known as a secured debt—the house guarantees payment and in most cases, gives the lender the right to the house above all other creditors.
After the creditor files the motion, you, the debtor, can oppose the motion at a hearing in front of a judge. If the creditor makes its case, the judge will grant the request and allow the lender to move forward with the foreclosure sale.
In this example, the court will likely grant the creditor’s request because:
You have no way of keeping the property or making future payments.
There isn't any equity in the property that can be used to pay other creditors.
The lien on the property gives the lender the right to recover the home, sell it at auction, and use the proceeds to pay toward the outstanding mortgage.
The longer the bankruptcy court prevents the lender from exercising the lien rights, the more money the creditor will stand to lose—with no gain to any other creditor.
But a creditor might file a motion to lift the automatic stay for other reasons. For instance, suppose that a creditor who was suing the debtor in another court at the time of the bankruptcy filing—usually in a state court—asks the bankruptcy court for permission to continue pursuing the lawsuit in that other venue. If the creditor can show that the trial outcome (judgment) will be non-dischargeable (will survive the bankruptcy) or doesn't involve a matter normally resolved in bankruptcy court (such as an enforcement action) and the outcome won't affect the rights of other creditors, the court will likely grant the motion—especially if the trial has been ongoing for some time
My law practice focuses exclusively on consumer bankruptcy law. I can help you decide if bankruptcy will solve your problems and which program, Chapter 7 or Chapter 13, is best suited to meet your financial needs. I have learned about the bankruptcy system in the District of Utah from the inside out.