The Bankruptcy Automatic Stay

Bankruptcy is the surest, fastest, most affordable, and least stressful way to financial freedom

How Does the Automatic Stay Work?

The Automatic Stay Stops Creditor Collections Against You and Your Property

The automatic stay is a pillar of bankruptcy law and one of the two main reasons (the discharge is the other) why individuals (and businesses) seek relief under the Bankruptcy Code.

The automatic stay (or simply the “stay”) applies to all bankruptcy chapters. This means the stay will apply in a chapter 7 or a chapter 13 case.

One of the main purposes of the automatic stay is to stop creditor collections actions against you and your property so that you can concentrate in either reorganizing your finances under chapter 13 or seeking a fresh start under chapter 7 in peace and without interference from creditors.

Another purpose is to stop the creditor “race to the courthouse” and to equitably distribute your property or income pursuant to the provisions of the Bankruptcy Code under one legal proceeding in bankruptcy court.

Generally, the stay will remain in effect until you receive a discharge and your case is closed or your case is dismissed.

The stay and the exceptions are discussed in more detail below.

is instant

The Automatic Stay Starts the Moment 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.

The stay is effective against your creditors even if they 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 will not hesitate to sanction that creditor.

The automatic stay continues while your case is pending until the court enters the discharge order, dismisses your case, or grants relief from the stay upon a creditor’s request.

to auto start

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.

The automatic stay will not go into effect 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 that usually result from violating the automatic stay.

But more sophisticated creditors may proceed against you.

A common scenario the foreclosure action, where the lender proceeds with the sale of your home because you’re on your third bankruptcy case in a span of 12 months.

This scenario is common when the debtor retains an attorney who is not familiar with the intricacies of the Bankruptcy Code.

While you can seek the bankruptcy judge to impose the automatic stay by motion, this application is no longer easy and automatic.

If the creditor asked for relief from the automatic stay, and the debtor subsequently asked the court to dismiss the case, and the court did (this is a voluntary dismissal), you may be barred from filing another bankruptcy case for 180 days.

If you are barred from filing, you will not be protected from the collections actions of any creditor.

Accordingly, while the stay is automatic, there are exceptions that can have severe consequences, particularly when they come into play when you are fighting to save a home from foreclosure.

stops collections

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.

  • 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 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.
to the stay

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:

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

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 auto stay

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

This is a simple rule: 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 may no longer be protected from your creditors even if you have a pending bankruptcy case.

You can, however, ask the judge to extend the automatic stay beyond the 30-day period by showing the judge filed the most recent case in good faith.

This is an example of how filing multiple cases makes getting bankruptcy relief more complicated.

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