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The Automatic Stay Stops Creditor Collections Against You and Your Property
The automatic stay applies to chapter 7 and chapter 13
The automatic stay has two main functions
One main purpose of the automatic stay is to stop creditor collections actions against you, your property, and the property of the bankruptcy estate.
This allows you to reorganize under chapter 13 or liquidate under chapter 7 in peace and without interference from creditors.
The bankruptcy automatic stay also stops the creditor “race to the courthouse.”
The race to the courthouse means that the first creditors to get judgments and record liens against you will be the first to get paid.
The automatic stay stops this race to allow for an equitable distribution of your assets and income among all your creditors pursuant to the provisions of the Bankruptcy Code under one legal proceeding in bankruptcy court.
There are exceptions to the automatic stay
Generally, the stay will go into effect the instant you file your case. And, generally, the stay will remain in effect for the duration of your case until you receive a discharge or until your case is dismissed.
But there are important exceptions to these general rules, discussed below.
The Automatic Stay Starts the Instant You File Your Case
The automatic stay goes into effect the very second you file your bankruptcy case with the court — even if your case is filed in the middle of the night.
You may think “How will creditors know the automatic stay is in effect if I filed in the middle of the night?” It doesn’t matter whether your creditors know or don’t know.
Federal law dictates that when the automatic stay goes into effect, your creditors must stop collections actions — the stay is effective against your creditors regardless whether they know or don’t know you filed.
Any collection actions creditors take against you and your property in violation of the stay are either void or voidable and generally can be undone.
Furthermore, if a creditor violates the automatic stay intentionally, the bankruptcy court may sanction that creditor.
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Exceptions to the Automatic Stay Starting Automatically and Instantly
When is the automatic stay not automatic? There are two common exceptions to the general rule of the automatic stay going into effect instantly and automatically.
Two or more cases dismissed in a 12 month period prior to your current case
The automatic stay will not go into effect at all if you:
- filed two or more cases prior to your current case, and
- two or more of these cases were dismissed within a 12-month period prior to the filing of your current case
If this is your situation, you will not have an automatic stay and the bankruptcy case WILL NOT stop your creditors.
Granted, creditors unfamiliar with the Bankruptcy Code may still stop collections actions against you for fear of sanctions for violating the stay. But more sophisticated creditors may proceed against you and the potential consequences can be grave (e.g. like losing your home).
You can, however, ask the bankruptcy judge to “impose the automatic stay.”
But first, you must serve your motion on your creditors before it can be heard by the judge — which is time consuming; and second you must prove to the judge that you filed your current case in “good faith,” which may elicit an objection from a creditor.
A creditor filed a motion seeking relief from the automatic stay in a prior case that was subsequently dismissed per your request
Here’s another scenario where the automatic stay may not apply because you may be barred from refiling your case for 180 days.
In this scenario, a creditor files a motion asking the court for “relief from the automatic stay” or to “lift the automatic stay” (creditors must ask the bankruptcy court to stop the automatic stay if they want to proceed against you outside of the bankruptcy court), and you file a motion to voluntarily dismiss your case which the court grants (this typically happens in a chapter 13 case).
If this happens you may be barred from filing another bankruptcy case for 180 days. And if you can’t file a bankruptcy case you can’t get the automatic stay.
There is a split among bankruptcy courts as to whether the bar to refiling is mandatory, discretionary, or contingent on a causal connection to the creditor’s motion for relief in the prior case.
The bottom line is this: if you voluntarily dismiss your case after a creditor files a motion for relief from stay you may be barred from refiling another bankruptcy case for 180 days or you may have to litigate the issue.
This is a situation that is best left avoided.
Accordingly, there are scenarios when the automatic stay may not automatically start. The consequences can be severe since you may lose your property — typically to foreclosure or repossession.
The Automatic Stay Stops Most Consumer Collections Actions
A “collection action” is a very broad category and includes many more creditor actions besides telephone calls and dunning letters.
Think of the “collection action” as any type of act by a creditor to collect a debt.
This can be an action against you personally, as in a lawsuit, wage garnishment, or a driver’s license suspension.
And it can also be an action against your property such as a car repossession or a foreclosure.
I want you to keep in mind that the automatic stay is more powerful in a chapter 13 reorganization.
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Exceptions to the Automatic Stay: There are Some Collections the Stay Will Not Stop
As with any general rule there are exceptions. And so is with the automatic stay.
Accordingly, the stay may not apply to some creditors, proceedings, and situations:
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The Automatic Stay Can Terminate Early
While the automatic stay will generally protect you from creditors and debt collectors for the duration of your case, I will discuss two common exceptions to this general rule.
First, the stay will terminate 30 after your case is filed if you filed a prior bankruptcy case and that case was dismissed within a 12-month period prior to the filing of your current case.
Second, a creditor can seek “relief from the automatic stay” by asking the bankruptcy judge to “lift” the stay for a particular debt so that the creditor can start or resume collections actions against you personally (this is rare) or against your property (this is common) outside the bankruptcy court.
Each exception is discussed below.
A Creditor Can Seek Relief From the Automatic Stay
A creditor can ask the bankruptcy judge for permission to start or to resume collections action against you (rare) or your property (common) outside of the bankruptcy court.
The Bankruptcy Code allows the creditor to seek relief from the automatic stay for several reasons. Two reasons are common:
In chapter 7 cases, secured creditors typically seek relief from the stay so they can start or continue collections actions against property that secures your loan (i.e. the collateral).
If you don’t have any equity in the property — in other words, the balance on the loan is more than the value of the property — the judge will generally grant the creditor’s request.
This scenario usually involves a person who files under chapter 7, is behind on installment payments, and has no equity in the property — typically a home or a vehicle.
Relief from the automatic stay for cause is a very broad category.
It generally means that a creditor must articulate a reason why the creditor will suffer harm unless the stay is lifted.
One situation arises out of a bad faith bankruptcy filing where the person is merely trying to delay the creditor’s collection action. A common example is a debtor filing chapter 13 to stop a foreclosure of his home even though the person is unable to propose a feasible chapter 13 plan to cure the arrears.
Another situation arises out of repetitive bankruptcy case filings that have the effect of delaying the relief the creditor is seeking (usually some sort of a lawsuit).
Finally, one more common situation is a person filing chapter 13 to keep a vehicle that he fails to insure. The creditor can seek relief from the stay because driving an uninsured vehicle may cause harm to the creditor if the uninsured vehicle, which serves as collateral for the loan, is damaged in an accident.
Relief from the stay under this category is typically filed by car creditors, mortgage creditors, or lawsuit plaintiffs.
The Automatic Stay Will Terminate Automatically 30 Days After You Filed Your Case
If you had one case dismissed in the 12-month period prior to the filing of your current case, the automatic stay will terminate 30 days after you filed your case.
Once the stay terminates, you and your property will no longer be protected from creditors collections actions even if your bankruptcy case is still pending.
Courts are split on whether the automatic stay terminates with respect to property of the bankruptcy estate. However, a Chicago bankruptcy court and the First Circuit Court of Appeal have recently ruled that it is not.
The way around the 30-day rule, is to ask the judge to extend the automatic stay beyond the 30-day period by showing the judge you filed the current case in good faith. The judge must grant your request prior to the 30-day termination deadline.
This is yet another example of how filing multiple cases makes bankruptcy relief more complicated.