Chapter 7 Bankruptcy and the Automatic Stay: Will it Stop my Creditors?

August 25, 2009

After you file for bankruptcy, the court issues an order called an “automatic stay.” This stops many creditors from trying to collect from you. This article discusses what the automatic stay can and cannot do for the bankruptcy filer.

What does the automatic stay prevent or stop?

Calls and letters from creditors and debt collectors

Once notified of your bankruptcy filing, creditors and debt collectors must stop calling you to try to collect. They must also stop sending you collection letters.

If you receive collection communications after filing bankruptcy, you can file a violation of stay action against the debt collector or creditor. Save any letters or recordings of calls that violate the automatic stay.

Foreclosure

The automatic stay temporarily stops foreclosure proceedings. But, the mortgage lender will often petition the court to lift the automatic stay to proceed with foreclosure. More on this below.

A Chapter 13 bankruptcy — which would allow you work out a repayment plan to bring your mortgage current– may be able to help if you need long-term help paying mortgage arrearages.

If you are not currently behind on your mortgage but you need to be relieved of your unsecured debt (for example, credit card debt) to continue paying your mortgage, a Chapter 7 bankruptcy may help as well.

But, keep in mind a Chapter 7 bankruptcy takes 3-6 months to complete. So, you will need to avoid mortgage delinquencies during that time. If you don’t, your servicer will likely petition the court to lift the automatic stay so it can foreclose.

Eviction

If you are a renter and you are being evicted from your home, the automatic stay may help buy you some time.

But, you will need to file bankruptcy before your landlord gets a judgment of possession against you. Once the landlord has a judgment of possession, he or she may proceed with the eviction as if you hadn’t filed for bankruptcy.

Wage garnishments

Filing bankruptcy stops many wage garnishments.

Garnishments of bank accounts

A bankruptcy filing may stop a bank account garnishment, depending on how far the garnishment has already progressed.

If you have received a notice that your bank account has been garnished, contact an attorney as soon as possible.

Utility disconnections

If a utility company is threatening to disconnect your electric, gas, water, or telephone service, the automatic stay will prevent disconnection for at least 20 days.

What the Automatic Stay Will Not Prevent

Some tax proceedings

The IRS can still audit you and issue demands for payment. But, the automatic stay does stop the IRS from issuing a tax lien, seizing your property, or garnishing your income.

Child support and alimony

Bankruptcy won’t stop a paternity lawsuit against you. Bankruptcy will not stop actions seeking to establish, modify, or collect child support or alimony.

Criminal proceedings

Bankruptcy will not stop criminal proceedings. But, if a criminal case also has a “debt component,” (for example, you are ordered to pay a fine), bankruptcy may stop the debt portion of the proceedings.

Loans from a pension

The automatic stay will not prevent your employer from withholding amounts to repay a loan from certain types of retirement plans and pensions. These include most IRAs and job-related pensions.

Multiple filings

If you had a previous bankruptcy case pending during the past 12 months, then the automatic stay will terminate after 30 days.

You can petition the bankruptcy court to extend the stay if you can prove the current case was filed in good faith.

Creditors Can Ask the Court to Life the Automatic Stay

While the automatic stay goes into effect automatically (hence the name), creditors may ask the bankruptcy court to remove (”lift”) the stay, if it is only postponing the inevitable.

For example, if you are far behind on your car or house payments and you will not be able to afford them even after your bankruptcy is discharged, the creditor in question may petition the court to lift the stay so it can proceed with foreclosure of the house / repossession of the car. (This will play out differently in Chapter 7 than in Chapter 13. Consult an attorney for more details.)

This makes bankruptcy planning very important. Both you and your attorney should devote time and attention to ordering your financial affairs so you can truly have a fresh, sustainable start after your bankruptcy is completed.