What Is an Automatic Stay in Bankruptcy?
Filing for bankruptcy initiates an automatic stay, which pauses collection efforts from your creditors. Not only are your creditors required to stop calling, but many of them must also stop collecting payments or threatening lawsuits during an automatic stay.
There’s nuance to this process depending on the situation. Let’s consider how an automatic stay may or may not help you.
- An automatic stay requires creditors to stop collection attempts and lawsuits 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.
- 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.
What is an automatic stay?
The moment you file for bankruptcy, an automatic stay is initiated, and it typically stays in place for the length of your bankruptcy process. With an automatic stay, most of your creditors cannot attempt to collect debts from you, sue you or repossess your assets. This period gives you time to reorganize your finances.
The length of the bankruptcy process varies by type. Chapter 7 bankruptcy may require you to liquidate many of your assets in an attempt to pay off as much of your debt as possible. The process is usually done within six months.
Chapter 13 bankruptcy can take anywhere from about three to five years. It can allow you to keep your assets as you work out a repayment plan.
Chapter 11 bankruptcy works somewhat 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, and it has higher associated costs.
To file for Chapter 13 bankruptcy, though, your total secured debts must be less than $1,580,125 and your total unsecured debts must be less than $526,700, as of publication. If you owe more than those amounts, you will likely need 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 — but only if the creditor knew about the stay.
Once your bankruptcy case is closed or dismissed, the automatic stay ends.
What an automatic stay usually stops
An automatic stay can put a temporary stop to any of the following:
- 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 be in effect for the duration of your bankruptcy case. This could be a few months to a few years. However, a judge could lift the stay either in whole or in part at any time — and especially at the petition of your creditors.
For example, if you appear to be filing for bankruptcy only in order to prevent a foreclosure, a court may give your lender relief from the stay. In many instances, if you’re filing a second bankruptcy within 12 months of the dismissal of a previous bankruptcy, the automatic stay will last only 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 again so soon 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.
What an automatic stay does not cover
There are limitations and exceptions to an automatic stay, even for situations that an automatic stay typically covers:
- 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 in some scenarios: 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 if your landlord won the eviction lawsuit: An automatic stay can stop an eviction in some cases. However, if your landlord has a judgment of possession in your eviction case or the landlord alleges illegal drug use or demonstrates that you may destroy the property, they can get the automatic stay lifted.
- If you owe 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 owed during tax season.
- 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 you may still have to repay the overage after your bankruptcy is resolved.
An automatic stay can prevent the utility company from shutting off your services for 20 days at minimum. It does not stop your obligation to pay the utility company, as it would with a creditor.
What happens when creditors violate the automatic stay
If a creditor knowingly violates an automatic stay, you can sue the company. The creditor may be forced to pay actual damages, including attorney fees, and in some cases, punitive damages.
How long does an automatic stay last?
Your automatic stay typically lasts the duration of your bankruptcy case, but the length of the case may depend on the type of bankruptcy you file. Also, your stay likely will be shorter if you’re a repeat filer.
- Chapter 7: You can usually complete a Chapter 7 bankruptcy within six months or less, so you can expect your stay to last about that long.
- Chapter 13: Your Chapter 13 bankruptcy may last three to five years, and so will your stay. That said, you’ll be required to make payments to your creditors under a court-approved plan during that time.
- Serial filer limits: If you’re filing for bankruptcy within 12 months of the dismissal of another bankruptcy, the automatic stay will last only 30 days, though you can appeal for more time. For your third filing and up within 12 months, you probably won’t get any stay automatically.
Tips for debtors with an automatic stay
Filing for bankruptcy is a big deal, and considering the pros and cons of bankruptcy is important.
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 you 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.
Most creditors should stop contacting you during the automatic stay. There will be a bankruptcy trustee who handles your case. If you are inappropriately contacted, you can bring those concerns to the trustee or your lawyer.
Frequently asked questions
An automatic stay can stop a foreclosure for the duration of your Chapter 7 bankruptcy process, which is typically up to six months. That said, your lender can seek an exception to continue foreclosure proceedings, and you’ll need to make mortgage payments while your bankruptcy proceeds.
If your Chapter 13 case is dismissed, your automatic stay ends, and creditors can contact you again. With a dismissal, your debts won’t go away, either.
Your automatic stay will generally last for the duration of your bankruptcy process. A Chapter 13 bankruptcy generally takes three to five years, while a Chapter 7 bankruptcy may take up to six months.
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