The Bankruptcy Automatic Stay
Find out how bankrupty can instantly stop your creditors, here!
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The automatic stay stops creditors the moment your case is filed -
The automatic stay is one of the main reasons individuals file bankrupty
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How and Why the Automatic Stay Stops Creditor Collections Against You and Your Property
The automatic stay is a pillar of bankruptcy law. It’s also one of the two main reasons (the discharge is the other) why individuals (and businesses) file bankruptcy.
You get the automatic stay in both chapter 7 and chapter 13 cases. The stay has two main functions. And, keep in mind that there are exceptions to the automatic stay!
The automatic stay applies to chapter 7 and chapter 13
The automatic stay (or simply the “stay”) applies to all bankruptcy chapters. This means the stay will apply if you file chapter 7 or if you file chapter 13.
In fact, the automatic stay is more powerful in chapter 13. This is because chapter 13 is a reorganization of your debts and a partial repayment, so it comes with more perks.
The automatic stay has two main functions
First, the stay stops creditor collection actions
One main purpose of the automatic stay is to stop creditor collections actions against you and your property.
This allows you to reorganize under chapter 13 or liquidate under chapter 7 in peace and without interference from creditors.
Second, the stay stops the creditor “race to the courthouse”
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 in line to go after your money and assets.
The automatic stay stops this race. And creditors have to participate in an equitable distribution of your assets and income among all your creditors pursuant to the provisions of the Bankruptcy Code.
This is done under one case, in one venue, and under one legal proceeding: your bankruptcy case 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.
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.
The Automatic Stay stops the following collections actions under both chapter 7 and chapter 13
- wage garnishments
- debt collector harassment
- lawsuits
- credit card calls and letters
- driver’s license suspensions
- frozen bank accounts
- repossessions
- foreclosures
- utility shut-offs
- evictions
- IRS collections
- and more
The Automatic Stay has these added benefits under chapter 13
- The chapter 13 automatic stay will force the return of a vehicle that has been repossessed. You can’t do that with chapter 7.
- The chapter 13 automatic stay will force the City of Chicago to take the boot off your car. You can’t do that with chapter 7.
- The chapter 13 automatic stay may help you get your impounded vehicle released from the City of Chicago auto-pound. Chapter 7 won’t help you do that.
- The chapter 13 automatic stay will protect a co-signer from collections actions even if the co-signer does not file chapter 13 with you.
- The chapter 13 automatic stay protects you for a long period of time (years) as you restructure your debts under chapter 13.
Exceptions to the Automatic Stay: There are Some Collections the Stay Will Not Stop
As with any general rule there are exceptions.
Accordingly, the stay may not apply to some creditors, proceedings, and situations:
Domestic Support Obligation Matters (child support, alimony, etc.)
The automatic stay may not stop domestic obligation creditors in the following proceedings:
- establishment of paternity
- establishment of modification of child support, alimony, and other domestic support obligations
- concerning custody and visitation
- dissolution of marriage proceeding except to the extent the proceeding attempts to adjudicate interests in marital assets
- collection of domestic support obligations from property that is not the property of the estate
- whithholding of income for payment of domestic support obligations
- suspension of a driver’s license, professional license, or recreational license as an enforcement action for overdue child support
- interception of state tax refund for collection of overdue child support
Criminal, Tax, and Other Proceedings, Matters, and Actions
The automatic stay may not stop the following proceedings:
- criminal proceedings
- eviction by sheriff after landlord has obtained a eviction judgment
- determination of liability for purposes of insurance coverage
- audits to determine tax liability and tax assessments
- interception of tax refund for period that ended before the case was filed
The Automatic Stay Can Terminate Early
The automatic stay, in most cases, will protect you and your property from creditors and debt collectors for the duration of your case. But, there are two common exceptions to this general rule.
First, the Automatic Stay Can Terminate Automatically 30 Days After You Filed Your Case
The automatic stay will terminate 30 days 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.
Once the stay terminates, you and your property will no longer be protected from creditors collections actions — even if your bankruptcy case is still open in bankruptcy court.
Courts are split on whether the automatic stay terminates with respect to property of the bankruptcy estate.
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.
Termination of the automatic stay is a good example of how filing multiple bankruptcy cases can make bankruptcy relief more complicated.
It is also a good example why you need a competent bankruptcy attorney to represent you from the start.
In bankruptcy court, fixing mistakes can be difficult if not impossible. This may lead to the loss of your property.
Second: A Creditor Can Seek Relief From the Automatic Stay
A creditor can seek “relief from the automatic stay.”
This means the creditor can ask the bankruptcy judge to “lift” the automatic stay for a particular debt for a particular reason. If the bankruptcy judge grants the request, the creditor can start or resume collections actions 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:
You filed under chapter 7 and you have no equity in the property that secures the loan
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.
For Cause: the creditor may have a good reason why the stay should be terminated
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. This is a scenario where an individual files bankruptcy solely to delay the creditor’s collection action. (Delaying the inevitable is not a proper reason for filing bankruptcy.)
One common situation 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 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 or repossession).
A third common scenario entails a creditor seeking relief from the automatic stay in chapter 13 to repossess an uninsured car. 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 or totaled in an accident.
In summary, relief from the stay under this category is typically filed by car creditors, mortgage creditors, or lawsuit plaintiffs.