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The Automatic Stay: Stopping Creditors with Bankruptcy

Once you file for bankruptcy, your assets will be transferred to the bankruptcy estate, and an automatic stay will kick in and protect you from your 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 that you should seriously consider if you are in financial trouble. For example, if you are behind on credit card payments, about to be evicted from your home, or if the utility companies have been threatening to turn off your service, then 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 stay is lifted by the bankruptcy court. 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, then you may want to 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?

In general, the automatic stay will remain in place until the bankruptcy proceeding is finalized 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:

1. Stopping Your Utilities From Being Disconnected

Sometimes when you are behind on a utility bill, the utility company will threaten to turn off your telephone, gas, electric, or water service. The automatic stay will often prevent the utility company from turning off your service for at least 20 days.

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 to not have your gas and electricity if it's the middle of winter.

2. Stopping Foreclosure Proceedings

If the bank or the financial institution that holds your mortgage is starting foreclosure actions, the automatic stay will stop the foreclosure in its tracks. However, even if it is temporarily stopped, your bank will most likely find a way to continue the foreclosure proceedings once the automatic stay is lifted. If keeping your house is one of your primary goals, you should consider filing for Chapter 13 bankruptcy instead of Chapter 7.

3. Stopping Evictions

The automatic stay may be able to stall an eviction proceeding if your landlord is trying 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.

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 on the property. In addition, even if you have been a model tenant, courts will generally side with the landlord if he or she asks the court for permission to evict you.

4. Stopping a Government Agency From Taking Back Overpayments of Public Benefits

If you were receiving public benefits before you filed your bankruptcy case, the automatic stay will stop the agency from collecting any benefits that were overpaid to you until the automatic stay is lifted.

Normally, the agency would collect the overpayment from you either by billing you or deducting from your future benefit checks. However, if you become ineligible to receive public benefits during your bankruptcy, the automatic stay will not stop the agency from collecting the overpayments from you.

What the Automatic Stay Can't Do For You

There are some situations and circumstances where the automatic stay will not help you. These include:

1. Stopping 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
  • If the IRS demands that you file a tax return, or issues a tax assessment
  • If the IRS demands payment for taxes that are owed

However, if you are protected by the automatic stay, the IRS cannot issue a tax lien against your income or property

2. Stopping Child Support and Alimony

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

3. Stopping Criminal Proceedings

If you are involved in a criminal proceeding that involves both a debt and criminal portion, the automatic stay will only stop the debt portion of the proceeding.

So, if you were convicted of petty theft and were ordered by a judge to make repayments and also conduct a certain number of hours of community service, the automatic stay will only stop the repayment portion of your sentence. You will still be required to complete your community service hours.

4. Stopping Wage Garnishment: Loans From Your Pension

If you took a loan against your pension, the automatic stay will not prevent your wages from being garnished in order to repay the loan to your pension.

The Automatic Stay: Filing for Bankruptcy Multiple Times

If you filed for bankruptcy after you filed for bankruptcy in the previous year, then the automatic stay associated with your current filing will terminate after 30 days unless the following are fulfilled:

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

However, if a creditor has filed a motion to lift the automatic stay in your previous bankruptcy matter, you will have to overcome a presumption that your current bankruptcy filing was filed in bad faith.

Creditors Can Still Get Around the Automatic Stay

In many situations, a creditor may be able to get around the automatic stay by asking the court to "lift the injunction" through a stay relief. To do so, the creditor normally has to show that the automatic stay is not serving its intended purpose.

For example, if you filed for bankruptcy the day before you were about to be evicted from your apartment, your landlord could probably go to the court and get the stay lifted by showing you have no way to pay the rent that you owe.

Speak to a Bankruptcy Attorney About Your Bankruptcy Issues

If you are facing significant financial hardships, filing for bankruptcy may be the best option for you. When you file for bankruptcy, an automatic stay will automatically come into effect. However, the automatic stay may not give you adequate protection against all creditors. Speak to a bankruptcy lawyer to get legal advice on whether filing for bankruptcy is the right path for you.

Next Steps

Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.

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