What Is Automatic Stay in Bankruptcy?

Key takeaways

• An automatic stay requires creditors to stop collecting, suing and even contacting you as you work your way through the bankruptcy process.
• You don’t need to do anything other than file for bankruptcy to initiate the automatic stay — though there are some exceptions.
• An automatic stay can shield you from many creditors, but there are some obligations you can’t avoid, like child support and alimony debts.
• To ensure you make the most of your automatic stay, consult with a bankruptcy attorney.

Filing for bankruptcy initiates an automatic stay, which stops those scary phone calls from your creditors. Not only will your creditors have to stop calling, but many of them will be required to stop collecting payments or threatening lawsuits.

There’s nuance to this process depending on the type of debt. Let’s consider how an automatic stay may or may not help you.

What is an automatic stay?

The moment you file for bankruptcy, something called an “automatic stay” is initiated. An automatic stay means that most of your creditors cannot attempt to collect debts from you, attempt to sue you or attempt to repossess your assets. This gives you time to reorganize your finances as you make your way through the bankruptcy process.

The length of the bankruptcy process varies by type. Chapter 7 bankruptcy usually requires you to liquidate many of your assets in an attempt to pay off as much of your debt as possible. The process usually takes about 80 to 100 days. Chapter 13 bankruptcy can take anywhere from about three to five years. It allows you to keep your assets as you work out a repayment plan.

Chapter 11 bankruptcy works similarly to Chapter 13, and it has a similar timeline of about three to five years. Chapter 11 is typically used by businesses rather than individuals because it’s more expensive. To file for Chapter 13 bankruptcy, though, your total debts must be less than $2,750,000. If you owe more than that, you would likely have to file Chapter 11, even as an individual.

If a creditor attempts to collect on a debt after an automatic stay goes into effect, you are allowed to seek damages. There are exceptions to this rule. If a creditor is not listed on your bankruptcy filings, it would not receive notice of the stay. Creditors need notification of the automatic stay to ensure they don’t violate it.

Once your bankruptcy case is closed, the automatic stay ends.

The protections of an automatic stay

An automatic stay can put a temporary stop to any of the following financial difficulties you may be experiencing:

• Wage garnishment
• Foreclosure
• Eviction
• Credit card collections or lawsuits
• Other collections or lawsuits on unsecured debts
• IRS collections
• Collections on overpaid public benefits

Normally, an automatic stay will last for the duration of your bankruptcy case. This could be a few months to a few years. However, at any point, but especially at the petition of your creditors, a judge could lift the stay either in whole or in part.

If you’re filing multiple bankruptcy cases close together, it raises red flags. In many instances, if you’re filing a second bankruptcy within 12 months, the automatic stay will only last 30 days, even though your case won’t close that quickly.

You can ask for the 30-day stay to be extended, but you’ll have to prove to the court that you have good cause for filing so closely together and that you’re not just playing the system. If this is your third case or more over the past 12 months, you aren’t likely to be granted a stay at all, though you can still try to argue your case to get one. It just won’t be automatic.

The limitations of an automatic stay

There are limitations to an automatic stay:

• Child support and alimony payments. If you owe child support or alimony, an automatic stay doesn’t protect you from wage garnishment or federal tax refund withholding. If you have another asset that’s a part of your bankruptcy case, that particular asset may be protected from domestic support obligations by the automatic stay under the right circumstances.
• Foreclosure. If foreclosure has already started, the mortgage lender could argue that you’re abusing the bankruptcy process to avoid foreclosure. If the court sides with the lender, the stay could be lifted. Whether the stay is lifted or not, you will need to make mortgage payments on time while your bankruptcy case is ongoing.
• Eviction. An automatic stay should stop an eviction. But your landlord can file a motion of relief, which would allow them to evict you anyways. This is only for eviction, though — they typically won’t be able to collect money for damages or backrent during this time, even with a motion of relief.
• Back taxes. The IRS can’t garnish your income while an automatic stay is in place, but it can withhold any federal tax refund you may be eligible for during tax season.
• Utility bills. An automatic stay can prevent the utility company from shutting off your services, but only for 20 days. It does not stop your obligation to pay the utility company like it would with a creditor.
• Overpayment of government benefits. If you intentionally took more benefits than you were owed while on a program like SNAP, the state can reclaim that money through wage garnishment. An automatic stay stops that process, but this type of debt usually can’t be discharged in bankruptcy. That means once the stay is lifted, you’ll still have to repay the overage.

Tips for debtors with an automatic stay

Filing for bankruptcy is a big deal. It’s a complex process, and considering the pros and cons of bankruptcy is important.

A bankruptcy can stay on your credit report for up to seven or even 10 years — while it’s a big hit, sometimes wiping your slate clean can be worth it. If you’re a business owner, a bankruptcy may allow you to reorganize your business rather than having to shut it down entirely.

To make it through the bankruptcy process with as little friction as possible, it’s a good idea to sit down with a bankruptcy attorney before you file. These professionals can help you decide if bankruptcy is the right move for your individual situation and ensure you’re using the automatic stay to your best advantage without breaking any rules. You want to avoid a scenario where you’re counting on the stay only to have it lifted by the courts.

Whether you employ an attorney or not, you should not have any direct communication with your creditors during the automatic stay. There will be a federal employee over your case called a trustee who should handle all of that communication. If you are inappropriately contacted, you can bring those concerns to the trustee or your lawyer.