The Automatic Stay: Stopping Creditors with Bankruptcy

Once you file for bankruptcy, the trustee will transfer your assets to the bankruptcy estate, and an automatic stay will protect you from creditors and bill collectors.

What Does 'Automatic Stay' Mean in Bankruptcy?

The automatic stay stops any lawsuits and collection efforts that are started against you by:

• A creditor
• A collection agency
• A government entity
• Another person seeking money from you

An automatic stay is a powerful tool you should seriously consider if you are in financial trouble.

For example, suppose you are behind on credit card payments, about to be evicted from your home, or the utility companies have threatened to turn off your service. In that case, the automatic stay can be a lifesaver.

Does the Automatic Stay Stop Wage Garnishment?

Yes. Once you file for bankruptcy, the automatic stay stops all wage garnishments until the bankruptcy court lifts the stay. A wage garnishment is a tool whereby a certain amount of your monthly income is taken from your paycheck to pay your creditor.

If you have multiple garnishments against your wages, consider filing for bankruptcy, as it would allow you to take home your entire paycheck.

What Are Automatic Stay Violations?

The automatic stay allows the bankruptcy filer to have some breathing room from the lenders. Thus, a creditor's attempt to repossess the debtor's property in violation of the automatic stay will not have any legal effect.

Bankruptcy laws provide that any debtor can bring a civil suit against a creditor for willful violation of the automatic stay and can recover damages.

What Happens After the Automatic Stay Is Lifted?

The automatic stay will generally remain in place until the court finalizes your bankruptcy and the bankruptcy judge discharges your debt. However, if the creditors get a court order lifting the automatic stay, they can go ahead with the foreclosure of the property (such as real estate) that secures the debt.

What the Automatic Stay Can Do For You

There are several things that the automatic stay can do for you and your financial situation. This includes:

Stop Your Utilities From Being Disconnected

Sometimes, when you are behind on a utility bill, the utility company threatens to turn off your telephone, gas, electric, or water service. The automatic stay often prevents the utility company from doing so for at least the first 20 days after the filing.

Even though your utility bill is probably not high enough to justify the filing of the bankruptcy petition by itself, it may influence your decision not to have your gas and electricity if it's the middle of winter.

Stop Foreclosure Proceedings

If the bank or financial institution that holds your mortgage is starting foreclosure actions, the automatic stay will stop the foreclosure in its tracks.

However, your bank will likely find a way to continue the foreclosure proceedings once the court lifts the automatic stay. If keeping your house is one of your primary goals, you should consider filing for Chapter 13 bankruptcy instead of Chapter 7.

Stall Evictions

The automatic stay may stall an eviction proceeding if your landlord tries to evict you. However, because of changes to the laws regarding the automatic stay, if your landlord already has a court-issued wrongful possession judgment against you, the automatic stay will not stop your landlord from evicting you. Also, even if your landlord has not started eviction proceedings against you, the automatic stay may only buy you a few days or weeks in your current home if the landlord brings a successful lift stay motion.

Generally, courts will side with landlords if the landlord can show that you are misusing the property, endangering it, or selling or using controlled substances. In any event, landlords will often reach an agreement with the tenant about past due rent and the automatic stay helps tenants in negotiating same, if possible.

Prevent Government Agencies From Taking Back Public Benefits

Suppose you received public benefits before you filed your bankruptcy case. In that case, the automatic stay will stop the agency from collecting any benefits that were overpaid to you until the court lifts the automatic stay.

What the Automatic Stay Can't Do For You

In some situations and circumstances, the automatic stay will not help you. These include:

Stop Some Tax Proceedings

The automatic stay will not help you in the following scenarios:

• If the IRS wants to audit you or issue a tax deficiency against you. But no stated policy shows that the IRS targets those who file for bankruptcy.
• If the IRS demands that you file a tax return or issues a tax assessment
• If the IRS demands payment for taxes you owe

However, if the automatic stay protects you, the IRS cannot issue a tax lien against your income or property.

You may also file a lawsuit within your bankruptcy proceeding, known as an adversary proceeding, to seek to discharge certain income tax debts, which are older debts.

End Child Support and Alimony

The automatic stay will not stop a lawsuit against you that attempts to establish paternity. In addition, it will not prevent a lawsuit that tries to establish, modify, or collect child support payments and alimony.

Stop Criminal Proceedings

If you are involved in a criminal proceeding involving debt, the automatic stay will generally not stop the debt portion of the proceeding.

So, suppose a judge convicts you of petty theft and orders you to pay restitution. The automatic stay will generally not stop the repayment portion of your sentence. You will generally still be required to complete your community service hours as well as pay your restitution.

Stop Wage Garnishment: Loans From Your Pension

If you took a loan against your pension, the automatic stay won't prevent your wages from being garnished to repay the loan to your pension.

What Happens if You File for Bankruptcy Multiple Times?

If you filed for bankruptcy in the previous year, the automatic stay will terminate after 30 days unless the following occurs:

• You, your trustee, the United States Trustee, or a creditor ask for the automatic stay to continue and
• You show that you filed the current bankruptcy in good faith

Creditors Still Have Options

In many situations, a creditor can circumvent the automatic stay by asking the court to lift the stay. To do so, the creditor must show that the automatic stay is not serving its intended purpose.

Some situations in which a creditor can successfully ask the court to lift the stay include:

• Landlord-Tenant Actions: If you file for bankruptcy the day before your landlord plans to evict you, the court may lift the stay because a judgment or warrant of eviction in favor of the landlord has already been issued.
• Foreclosures: If your mortgage defaults, the lender may ask the court to exclude your loan from bankruptcy. The granting of this motion would delay the foreclosure.
• Judgments and Liens: If a creditor already has a judgment against you, the automatic stay may not help.
• Car Loans: If a financial institution wants to repossess your vehicle, they will ask the court to let them proceed. You can avoid possible repossession if you agree to reaffirm your car loan.
• Child Support and Alimony Obligations: If you owe back support, the court will likely lift the automatic stay.

Speak to a Bankruptcy Attorney About Your Bankruptcy Issues

If you face significant financial hardships, filing for bankruptcy may be your best option. When you file for bankruptcy, an automatic stay will come into effect. However, the automatic stay may not protect you from all creditors.

Speak to a bankruptcy lawyer for legal advice on whether filing for bankruptcy is right.

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