Whether to file for bankruptcy protection is a difficult decision, but once a bankruptcy petition is filed all debt collection efforts must stop. The Bankruptcy Code provides debtors with a window of protection from creditors, which allows time to assess their financial situation. While protected, a debtor has time to determine how much, if any, of the debts can be repaid and what assets can be retained or must be surrendered.
This important feature of the bankruptcy process is called the “Automatic Stay.” When a court stays a proceeding, it means all action on the case stops until the court authorizes resumption of the activity.
During bankruptcy all available debtor assets are combined and an assessment is made regarding how much can be repaid to creditors. It is thus important that some collection or repossession activity not unfairly benefit one creditor over another. To prevent a run on the assets of the estate, and to simply relieve the debtor of the pressure of multiple creditors all demanding payment, Congress enacted the automatic stay provision to stop all collection activity.
To this end, the stay is automatic. When a debtor files their petition in bankruptcy court, pays their filing fee and the clerk timestamps the petition, the stay is in effect instantly. Unlike a temporary injunction, no judge has to review the filing or issue any order.
Halts Collection Activity
Broad areas of collection-type activity are stopped by the stay. The Code prohibits:
- calling the debtor and demanding payment
- mailing bills or invoices for the debt
- filing lawsuits to collect the debt
- repossession of a vehicle or other asset
- enforcement of a Judgment against the debtor
In addition, ongoing wage garnishment and automatic direct debit payments (i.e. a mortgage payment electronically deducted from your bank account) must also stop. One of the most important features of the automatic stay is that the foreclosure process is halted.
Exceptions to the Automatic Stay
The automatic stay is broad, but is not all inclusive. Congress created exceptions to the list of activities that the stay prohibits.
The stay does not stop a paternity action, lawsuits involving domestic support obligations, child custody, visitation or other aspects of a divorce case (it does, however, stay the division of marital assets that are part of the bankruptcy estate).
Generally, “domestic support obligations,” i.e. child and spousal support payments are excluded from the bankruptcy system, and support debts cannot be discharged in a bankruptcy. Your bankruptcy attorney can explain how this applies to your specific situation.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) added some additional exceptions to the automatic stay to reduce abuse by serial filers. Those exceptions affect those who have filed a prior bankruptcy within the previous year.
Sanctions for Violations of the Automatic Stay
Creditors who violate the automatic stay can be sanctioned by the court. Damages include actual money damages, court costs and attorneys fees. In serious violations, the court can impose punitive damages in addition to the actual damages, to punish the creditor for bad behavior.
A violation can range from inadvertently failing to stop debiting a checking account of monthly payments, which is generally less serious, if they return the funds quickly. A much more serious violation might be repossessing a vehicle after receiving notice of the bankruptcy. Unless creditors have relief from stay, they should generally refrain from any collection activity.
Relief From the Automatic Stay
Simply because a bankruptcy offers immediate protection from collection efforts does not mean you get to keep all your stuff and pay nothing. Secured creditors, such as mortgage lenders and car loan companies, typically expect either you will continue paying your mortgage or car loan, or you will surrender the property.
Chapter 7
Creditors often file for relief from a stay in Chapter 7. Most Chapter 7 petitions are “no asset” bankruptcies, and just as it sounds the debtor has no assets for the estate to distribute to creditors.
If the debtor has a car they cannot afford, the vehicle can be returned to the lender and sold at an auto auction. However, the lender must obtain relief from the automatic stay before it can sell the vehicle.
Chapter 13
In Chapter 13, the debtor can keep a home and/or vehicles, as long as the debtor continues to make payments to the creditors.
However, sometimes during the typical five year Chapter 13 plan, a debtor will have additional financial problems and will not be able to make the required payments. In this situation, a creditor with a secured interest in a car or truck might move for relief from the stay to repossess the vehicle and sell it at an auction. This is often the case with vehicles, because the value rapidly depreciates.
Not a Permanent Solution
The automatic stay is not intended to be a permanent. Courts will grant orders lifting the stay for specific secured assets absent a compelling reason. For example, if you stop paying a vehicle loan, the creditor or lender will quickly move to obtain relief from the stay.
For more specifics on how an automatic stay will affect your situation, you should speak with an experienced bankruptcy attorney. The immediate stay may be just what you need to review your financial situation and decide your next steps.