Understanding Bankruptcy

What Is Automatic Stay in Bankruptcy?

A bankruptcy discharge gives those at the end of their financial tether an opportunity to start over. It’s by no means an easy path to go on, but on the bright side, once a bankruptcy is filed, there’s this thing called the automatic stay that goes into effect immediately to protect you from precarious situations such as evictions, foreclosures, and wage garnishments.

Though the protection is temporary, it can give you some much-needed breathing room during the bankruptcy to work out a plan to turn over a new leaf.

We will explain what automatic stay is, and what it can and cannot prevent during bankruptcy in this post.

Table Of Contents

What is the bankruptcy automatic stay?

What does the automatic stay prevent?

What does the automatic stay NOT prevent

Can creditors avoid the automatic stay?

What can I do if a creditor has violated automatic stay?

What is the bankruptcy automatic stay?

When you file for bankruptcy, the court issues an order called automatic stay, which stops creditors from collecting on the debts you owe them during the bankruptcy process.

In most cases, the stay kicks in the moment you file for bankruptcy — regardless the type of bankruptcy.

“It’s basically a court order saying, ‘Nothing can happen until the court proves it,’” said Jen Lee,  a consumer debt attorney based in California. “It’s like a line in the sand that says, ‘Okay, going forward, only certain things can happen, but the stay is in place to protect the bankruptcy estate and the assets.’”

However, the automatic stay doesn’t last forever. It ends when the case is closed or your debts get discharged — meaning your debts are forgiven. Depending on the type of bankruptcy filed, the length of the stay varies.

A Chapter 7 case typically lasts 90 to 120 days. Chapter 7 bankruptcy allows debtors to cover debt by liquidating all their unprotected assets, meaning they have to sell some of their assets to pay off debts. In general, their debts get discharged when the case is closed. This means the automatic stay lasts for three to four months.

With Chapter 13, which requires debtors to repay some or all of their debts based on how much they expect to earn over three to five years (but they can keep their assets), the automatic stay remains effective when the debtor is on the repayment plan, according to bankruptcy attorneys. After the repayment period of up to five years ends, the remaining balance will be discharged and the stay expires.

What does the automatic stay prevent?

Derek Caldwell, a bankruptcy lawyer based in North Carolina, said the automatic stay is a comprehensive mechanism to prevent most creditors from taking steps to collect debts owed before the bankruptcy filing. Here are a few examples where you will be protected by the automatic stay:

Utility disconnections

When you fall behind on your utility bills, utility companies are not allowed to disconnect your services if you have an ongoing bankruptcy case. However, at that point, Caldwell explained, if the creditor seeks to demand a deposit from you, the bankruptcy court will allow them to do that.

Foreclosure

If your creditor has foreclosed on your house, the foreclosure will be stopped by the filing of the automatic stay and they would have to cease all steps going forward with the foreclosure. However, bankruptcy attorneys said the creditor might file to have the stay lifted so that they can complete the foreclosure if you don’t keep up with your mortgage payments.

Eviction

The automatic stay can keep a landlord from evicting a tenant if the landlord has filed for the eviction prior to the bankruptcy filing but hasn’t gotten an eviction judgment for possession from the housing court.

While an automatic stay might buy you some time, the landlord may not necessarily allow you to stay in his/her property, waiting for the automatic stay to expire. The landlord can ask the court to lift the stay to evict you if you haven’t caught up on past-due payments or still miss ongoing rent payments.

Wage garnishments

Wage garnishment rules vary by state, but they allow portions of your wages to be deducted from your paycheck to pay back your debt. When you file for bankruptcy, the automatic stay puts a stop to wage garnishments because your creditor can no longer collect that debt, Lee said, and  as a result, you can get your full salary. And if you owe taxes, the IRS can’t garnish your wages either when the bankruptcy case is open, Lee added.

Harassment from creditors

Lee said many people end up filing for bankruptcy because they couldn’t stand the multiple calls from creditors. As soon as that bankruptcy is filed and the stay goes into effect, creditors cannot contact or harass you anymore. “So that’s kind of a relief for clients because it gives them a break,” she said.

That said, you don’t actually have to file bankruptcy to stop debt collectors from contacting you. The Fair Debt Collection Practices Act (FDCPA) is a federal law that sets rules on what creditors can and cannot do when collecting debts. Check out the rules on this page.

What does the automatic stay NOT prevent

Evictions with judgments

We said earlier that if your landlord filed an eviction against you but hasn’t received a court order, he/she can’t go forward with the eviction due to the automatic stay. However, attorneys said that depending on the state, the automatic stay may not protect you from the eviction if the landlord has received a judgment of possession prior to your filing for bankruptcy.

Domestic support actions

In the bankruptcy code, there are provisions that say that some domestic support, such as child support, is not subject to the automatic stay. When a parent owes child support, the state’s child support enforcement agency doesn’t have to get permission from the bankruptcy court to enforce collection of child support, Lee said.

Criminal proceedings

Criminal prosecutions are not protected by the automatic stay if the underlying basis for the prosecution was separated from the debt collection action, Caldwell said.

Caldwell explained that the most common issue where a criminal proceeding intersects with bankruptcy is bad checks. If someone is convicted of writing a bad check and is sentenced to community service or ordered to pay a fine, Caldwell said the automatic stay won’t affect the criminal prosecution, meaning the person has to serve the sentence or pay the fine.

However, if the creditor reported to the local district attorney for prosecution and the real reason they did it was so that they could collect the debt on the check, then that is barred as that would be an action to collect the debt that’s subject to the automatic stay, Caldwell said.

Loans from a pension

If you borrowed from your 401(k) plan or another equivalent retirement account prior to declaring bankruptcy, the loan payments are treated differently depending on the type of bankruptcy you file.

If you are in a Chapter 13 bankruptcy, there are provisions in the bankruptcy code that allow you to repay the loan you took out of your 401(k) account; money can be deducted from your income to pay back the loan, according to bankruptcy attorneys. The automatic stay won’t stop that.

“Even though it’s a loan, really, you are borrowing from yourself,” said Brett Weiss, a Maryland-based bankruptcy attorney. “It’s not really a bankruptcy issue here. It’s a tax issue.”

But if you’re in a Chapter 7 bankruptcy, the loan then becomes a distribution and you have to pay taxes to the IRS if you stop making the payments, because there’s no provision in the bankruptcy code to repay that 401(k) loan, Caldwell said.

Multiple filings

Bankruptcy attorneys said when an automatic stay can’t put a stop to debt collection efforts, it usually happens to serial filings or multiple filings.

What happens is when someone files for bankruptcy but the case is dismissed because they don’t follow court orders or don’t make payments, then this person turns around and files another case, Lee explained.

“The courts don’t really have much patience for that,” Lee said.

Two cases in one year

If you have one bankruptcy case that was dismissed in the past year and you file another case, then you only get a 30-day automatic stay this time around, according to bankruptcy attorneys.

If you wish to expand the stay, you have to file a motion and explain at a court hearing what the changing circumstances are or why you should get the full stay in the second case, Lee said.

Three cases in one year

If you file a third case in the same year, you won’t be granted an automatic stay at all, attorneys said, but you can file a motion to impose an automatic stay.

“Then you really have to explain what has changed, why you should get a chance to do that,” Lee said.

Can creditors avoid the automatic stay?

The automatic stay stops most collection efforts during your bankruptcy, but the stay is not absolute. After you file for bankruptcy, if a creditor thinks they have the right to collect on debts, they can ask the court for permission and provide a legitimate reason of why they should be allowed to enforce the debt. If the court grants them the lift, the creditor can continue collections against you.

What does it mean if the stay is lifted?

Usually, the stay is lifted as a particular creditor goes to the court. If the bankruptcy court grants this creditor relief from the automatic stay, it can continue to go after the debtor. However, the whole stay isn’t lifted.

“If you have a bunch of credit card debt and then you also have a car loan, and the car loan goes in to lift the stay, only the car lender is the one who can continue collection actions,” Lee said. “The rest of the creditors are still stayed.”

What must happen for this to be done?

Requests to lift automatic stays are mostly granted in Chapter 13 cases, and they oftentimes involve back payments on secured debts — backed by collateral to reduce the risk associated with lending, such as a mortgage.

This is because the personal liability is discharged in bankruptcy, but the creditor can always collect against the collateral for the loan, Lee explained.

If you have a car loan and you didn’t make payments after filing a bankruptcy, the court will likely grant the creditor a lift to pursue the debt because the creditor has the right to recover their collateral, Lee said.

“The creditors have to show that not being able to recover their collateral is detrimental to them, that they are losing money from not being able to go ahead with action against the collateral,” Lee added.

Similarly, if you fall behind on your mortgage payments, the mortgage lender can seek a motion to lift the automatic stay for a foreclosure to take place. When you miss your rent payments, your landlord can also file a motion to lift the automatic stay to evict you.

What can I do if a creditor has violated an automatic stay?

If creditors contact you immediately after you filed for bankruptcy, it’s possible that they are not aware of your filing.

“The bankruptcy courts realize that filing bankruptcy does not magically notify everybody instantaneously,” Caldwell said. “It takes approximately a week to maybe 10 days for the mailed notices to get sent to the right places and to get processed.”

Lee said she’d normally send the creditor going after her clients at this point the bankruptcy filing record and a letter warning the creditor that continued collection actions may result in a motion for violation of a stay.

“I try to give them the benefit of the doubt,” Lee said.

However, if the creditor doesn’t stop contacting you or knowingly pursues debt collection when the automatic stay is effective, you can file a motion for violation of the automatic stay, attorneys said.

The judge can grant sanctions against the creditors, which can vary depending on how egregious the violation is. Lee said that most of the time when a situation gets bad, the creditors will likely have to cover the debtor’s attorneys fees for the additional work that the debtor didn’t anticipate for the attorney to do.