What Does the Automatic Stay Do in Bankruptcy?

An automatic stay provides you with relief from creditors during bankruptcy proceedings. 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.

An automatic stay is just that. It begins on the day you file for bankruptcy and pauses some lawsuits and collection efforts against you until your bankruptcy is final. The stay is automatic as soon as a debtor files. Under the federal code, 11 U.S.C. § 362, the stay freezes all actions against the debtor by any creditors named in the filing.

The automatic stay lasts until:

• The case is closed or dismissed
• In a Chapter 7, until the debtor receives a discharge
• In a Chapter 13, until the debtor receives a discharge after completing a court-approved payment plan

This means creditors can’t continue contacting you for payment until the filing is resolved or dismissed.

What Does an Automatic Stay Do?

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

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

A stay does not cancel collection activities. It only suspends them during bankruptcy proceedings and protects creditors’ rights throughout the process. Some creditors may still attempt to collect money after requesting relief from the stay in bankruptcy court.

An automatic stay prevents collection agencies from calling you, sending you collection letters, and making other attempts to contact you during the bankruptcy period. Any lawsuits and repossession efforts must cease. If your wages are currently being garnished, it stops until after the bankruptcy discharge.

An automatic stay can stop:

• Utility disconnection: If you’re far enough behind on your bills that the utility company is threatening to disconnect your service, the stay will prevent that. This often lasts for at least the first 20 days after filing.
• Evictions: If your landlord has not started eviction proceedings, the stay prevents them from doing so. If they already have a court order for wrongful possession, they can continue with the eviction. Landlords can request a removal of stay if it appears you are misusing the property.
• Foreclosures: Automatic stays stop foreclosures instantly. Once the stay ends, the foreclosure resumes. If the foreclosure was the cause of your bankruptcy, consider Chapter 13 and a reorganization to keep your home.
• Interruption of public benefits: If you were receiving public benefits before filing bankruptcy, the stay prevents a governmental unit from trying to collect overpayments. They may resume after the bankruptcy process ends.
• Wage garnishment: If your wages are being garnished to pay creditors, the stay ends all such payments until the bankruptcy judge discharges your case. Depending on the resolution, creditors may try to garnish again after a discharge or dismissal.

A stay may also stop other attempts to collect that aren’t listed here. Every bankruptcy is different.

What Does an Automatic Stay Not Prevent?

There are some things the automatic stay does not cover. A bankruptcy case clears debts from unsecured and secured creditors. There are other types of debts you must continue to pay, such as the following:

• Tax proceedings: IRS audits, tax returns, or tax assessments are not affected by bankruptcy. While the automatic stay covers you, the IRS cannot issue a tax lien against your property or income.
• Domestic support obligations like child support or alimony: Wage garnishments for child support are not affected. Lawsuits for paternity, support, and other family law proceedings will continue.
• Criminal proceeding: Outstanding court-ordered payments for fees, fines, and restitution are still due. Criminal proceedings for tax fraud or tax evasion can still go forward.

Some types of wage garnishment, such as loans against your pension, can still proceed.

How Creditors Can Lift a Stay

Creditors can ask a court to lift or remove a stay through a motion process. They may claim that their interests are not protected by the bankruptcy proceedings, or that the debtor filed in bad faith. Types of motions include:

• Motion for relief from stay: Creditors may seek relief from the stay for specific properties, alleging that the debtor lacks equity in those properties and therefore they are not needed for reorganization
• Lack of adequate protection: If a bankruptcy affects a secured creditor’s interest, they can ask the court to lift the stay so they can proceed with foreclosure or repossession by showing that the property’s value is being harmed by the delay
• Bad faith: If a debtor files for bankruptcy to evade creditors or collection efforts, it is a “bad faith filing.” Courts may dismiss the bankruptcy or lift the stay while other investigations continue.

Some situations in which a creditor may 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. This is because a court has already issued a judgment or warrant of eviction in favor of the landlord.
• Foreclosures: If your mortgage defaults, the lender may ask the court to exclude your loan from bankruptcy. Granting this motion would resume the foreclosure.
• Car Loans: If a financial institution wants to repossess your vehicle, it will ask the court to allow it to proceed. You can avoid possible repossession if you agree to reaffirm your car loan.
• Child Support and Alimony Obligations: It’s very difficult to obtain a stay of child support or alimony. If you owe back support, the court does not enforce the automatic stay.

These matters can get complex. If you ever feel out of your depth, consider meeting with a bankruptcy attorney.

What Happens if a Creditor Violates the Stay?

The purpose of the stay is to give the debtor some relief from lenders and creditors. Continued efforts to legally repossess a debtor’s property will have no effect.

The bankruptcy code provides that debtors may file a civil suit against creditors who intentionally violate the stay by continuing attempts at repossession or foreclosure. A debtor can recover:

• Actual damages, such as the cost of recovering any property (like vehicle impound fees)
• Attorney fees and costs
• Punitive damages if the creditor knew of the bankruptcy filing and acted with malicious intent

If the creditor acted in good faith or believed the property was not included in the bankruptcy, the debtor can only recover actual damages. Actions that violate the stay are usually void or voidable.

Automatic Stay in Chapter 7 and Chapter 13 Bankruptcies

The automatic stay applies in both Chapter 7 and Chapter 13 bankruptcies. The stays cover the same types of debts and offer the same debt relief, but there are a few differences based on what each type of bankruptcy does.

A Chapter 7 stay lasts until the case is closed or discharged, about three to four months. The stay applies only to the individual who filed for bankruptcy.

Chapter 13, which creates a monthly payment plan for the debtor, has a longer stay period. It lasts while the repayment plan is in effect, often three to five years. The stay also covers any co-debtors. If the filer has any cosigners on their debts or loans, the stay protects them during the bankruptcy.

Get Legal Advice From a Bankruptcy Attorney

If you face significant financial hardships, filing for bankruptcy may be your best option. When you file for bankruptcy, an automatic stay will take effect, but it may not protect you from all creditors. Speak to a bankruptcy lawyer for legal advice on whether filing for bankruptcy is right for you.