The Bankruptcy Automatic Stay: What It Stops and What It Doesn't

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When debt becomes overwhelming, constant collection calls, lawsuits, wage garnishments, and threats of foreclosure can make an already difficult financial situation even more stressful. For people considering bankruptcy, one of the most important protections to understand is the automatic stay.

The automatic stay is a legal protection that generally takes effect when a bankruptcy cases is filed. It can temporarily stop many collection activities and give a debtor breathing room while the bankruptcy court for permission to proceed.

However, the automatic stay does not stop every type of legal or collection action, and there are circumstances in which a creditor may ask the bankruptcy court for permission to proceed.

Understanding what the automatic stay does —and does not do —can help you make more informed decision about bankruptcy.

What Is the Automatic Stay?

The automatic stay is a legal injunction that generally begins when a bankruptcy petition is filed. Under federal bankruptcy law, it can prevent creditors from taking certain actions to collect debts that arose before the bankruptcy case.

The U.S. Bankruptcy Code provides that the stay generally prohibits actions such as starting or continuing lawsuits enforcing certain judgments, obtaining property from the bankruptcy estate, and attempting to collect pre-bankruptcy debts. 11 U.S.C.§ 362

In practical terms, filing bankruptcy can create temporary pause in many collection efforts.

What Can the Automatic Stay Stop?

The automatic stay can generally prevent creditors from continuing several types of collection activity.

1. Collection Lawsuits

   If a creditor is pursuing a lawsuit to collect a debt that existed before the bankruptcy filing, the automatic stay generally stops the lawsuit from moving forward.

2. Wage Garnishments

   The automatic stay generally stops many wage garnishments related to pre-bankruptcy debts.

However, there are exceptions to the automatic stay, including certain types of domestic support obligations and other actions specifically identified in the Bankruptcy Code.

3. Collection Calls and Letters

   Creditors generally cannot continue ordinary collection efforts for debts subject to the stay after a bankruptcy case is filed.

The U.S. Courts explains that the automatic stay generally prevents creditors from initiating or continuing collection actions against the debtor while the stay is in effect.

4. Certain Foreclosure Proceedings

The automatic stay can temporarily stop a foreclosure action after a bankruptcy petition is filed.

For some homeowners, Chapter 13 bankruptcy can provide an opportunity to catch up on certain past-due mortgage payment through court-approved repayment plan.

The U.S. Courts identifies stopping foreclosure and allowing eligible debtors to cure mortgage arrears over time as important features of Chapter 13.

5. Certain Repossession Actions

   Depending on the circumstances, the automatic stay may temporarily prevent a creditor from repossessing property securing a debt.

That protection does not necessarily mean the debtor can permanently keep the

property without addressing the underlying secured debt.

What the Automatic Stay Does Not Stop

One common misconception is that bankruptcy automatically stops every legal problem.

It does not.

Federal law contains numerous exceptions to the automatic stay. Certain criminal proceedings, child support, and other domestic support matters, some tax-related actions, and other proceedings may continue despite a bankruptcy filing.

This is one reason it is important to have an attorney evaluate your specific circumstances rather than assuming that bankruptcy will automatically stop every creditor or legal action.

Can a Creditor Ask the Court to Lift the Automatic Stay?

Yes.

A creditor may ask the bankruptcy court for relief from the automatic stay in certain circumstances.

For example, a secured credit or may eek permission to continue an action involving collateral when the requirements under bankruptcy law are met.

If the court grants relief from the stay, the creditor may be allowed to continue an otherwise prohibited action.

The existence of the automatic stay therefore does not mean creditors permanently lose their rights. Instead, it generally provides a period of protection while the bankruptcy case is administered.

How Long Does the Automatic Stay Last?

The automatic stay generally begins when the bankruptcy case is filed and remains in effect unless it ends under the Bankruptcy Code or the court grants relief from the stay.

There can be special limitations when someone has filed previous bankruptcy cases that were dismissed. In some circumstances, the stay may last for only a limited period or may not arise automatically at all.

Because previous bankruptcy filing can affect the protection available, anyone who has filed bankruptcy before should discuss their history with a bankruptcy attorney before filing another case.

Does the Automatic Stay Eliminate Your Debt?

No.

This is an important distinction.

The automatic stay is a collection protection, not the same thing as a bankruptcy discharge.

A bankruptcy discharge is a the court's order that releases a debtor from personal liability for certain qualifying debts. The U.S. Courts explains that a discharge generally prevents creditors from taking collection action on debts that have been discharged.

Some debts are not dischargeable, and certain liens may survive bankruptcy even when personal liability for a debt is discharged.

In other words:

Automatic stay = generally pauses collection activity

Discharge = may eliminate personal liability for qualifying debts.

These are separate protections with different purposes.

How Chapter 7 and Chapter 13 Treat the Automatic Stay

The automatic stay can apply in different types of bankruptcy cases, but Chapter 7 and Chapter 13 serve different purposes.

Chapter 7 Bankruptcy

Chapter 7 is generally designed to provide a liquidation process through which eligible individuals may receive a discharge of qualifying debts.

The automatic stay can provide immediate protection from many collection efforts while chapter 7 case proceeds.

Whether a persona can protect their property depends on applicable bankruptcy exemptions and the specific facts of the case.

Chapter 13 Bankruptcy

Chapter 13 allows an individual with regular income to propose a court-approved repayment plan, generally lasting three to five years. The automatic stay can provide protection from many collection actions while the debtor makes payments through the Chapter 13 plan. Chapter 13 may also provide specific protections for certain co-debtors on consumer debts.

For homeowners facing foreclosure, Chapter 13 may provide a way to address qualifying past-due mortgage payments through the repayment plan, while future mortgage payments generally remain due.

What if a Creditor Contacts You After You File?

If you have filed bankruptcy and a creditor continues collection activity, do not simply assume that the creditor is violating the law.

There may be exceptions to the automatic stay, the creditor may not yet have received notice of the filing, or the debt may involve an action that is not covered by the stay.

Keep records of communications and provide them to your bankruptcy attorney. Your attorney can determine whether the creditor's conduct violates the automatic stay and what action may be appropriate.

Why Timing Matters

The automatic stay generally takes effect when the bankruptcy case is filed. That means the timing of a bankruptcy filing can matter when someone is facing:

• A pending lawsuit

• A wage garnishment

• A foreclosure

• A vehicle repossession

• Collection actions

• Other creditor enforcement activity

However, filing bankruptcy should not be treated as a last-minute tactic without understanding the consequences.

A bankruptcy filing affects your property, debts, creditors, financial obligations, and long-term financial situation. A careful review before filing can help determine whether bankruptcy is appropriate and which type of bankruptcy may provide the most effective relief.

Frequently Asked Questions

Does bankruptcy stop collection calls immediately?

The automatic stay generally prevents many collection actions after a bankruptcy case is filed. However, exceptions exist, and creditors may not immediately have received notice of the filing.

Can bankruptcy stop a wage garnishment?

The automatic stay generally stops many wage garnishments associated with pre-bankruptcy debts. Certain garnishments and legal proceedings are excluded from the stay, so the specific circumstances matter.

Can bankruptcy stop foreclosure?

The automatic stay can generally stop a foreclosure after a bankruptcy filing. Chapter 13 may also allow eligible homeowners to address certain mortgage arrears through repayment plan. However, bankruptcy does not eliminate the mortgage or guarantee that a foreclosure cannot eventually proceed.

Does the automatic stay last forever?

No. The stay is generally temporary and can terminate under certain circumstances or be lifted by the bankruptcy court.

Does bankruptcy erase every debt?

No. Certain debts are excluded from discharge under federal bankruptcy law. The specific debts that remain the debtor's responsibility depend on the bankruptcy chapter and the circumstances of the debt.

When Should You Speak With a Bankruptcy Attorney?

If creditors are threatening legal action, garnishing your wages, pursuing foreclosure, or repeatedly contacting you about unpaid debts, it may be time to understand your legal options.

An experienced bankruptcy attorney can review your financial circumstances, explain how the automatic stay may apply, identify potential exceptions, and help determine whether Chapter 7, Chapter 13, or another solution may be appropriate.

Bankruptcy is not the right solution for everyone. But if debt has become unmanageable, understanding your protections available under federal bankruptcy law can be an important first step.

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The automatic stay is one of the most significant protections provided by the bankruptcy process. It can give eligible debtors temporary relief from many lawsuits, garnishments, collection efforts, foreclosure actions, and repossession attempts.

But the protection has limits.

Understanding what the automatic stay covers, what it does not cover, and how long it may remain in effect can help you approach bankruptcy with realistic exceptions.

If you are facing overwhelming debt or aggressive creditor action, speaking with a qualified bankruptcy attorney can help you understand your options and determine the next step toward financial relief.

References

1. United States Courts — Bankruptcy Basics: Chapter 13 Bankruptcy Basics. The U.S. Courts explains Chapter 13, including the automatic stay, repayment plans, foreclosure protection, and co-debtor protections.

2. United States Courts — Bankruptcy Basics: Discharge in Bankruptcy. Provides information about bankruptcy discharge and debts that may not be discharged.

3. United States Courts — Bankruptcy Basics: Process. Provides an overview of the bankruptcy process and protections available during bankruptcy proceedings.

4. 11 U.S.C. § 362 — Automatic Stay. The federal statute establishing the automatic stay and its exceptions.

5. United States Courts — Bankruptcy Basics Glossary. Provides definitions for key bankruptcy terms, including the automatic stay, Chapter 7, and Chapter 13.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Laws change regularly and the application of any rule depends on the specific facts of each case. For guidance regarding your specific situation, please contact A & L, Licker Law Firm, LLC directly.