When someone files for bankruptcy, they receive what is called an automatic stay. The automatic stay is a powerful tool which prevents creditors from collecting debts from the bankruptcy estate while the bankruptcy is in progress. For example, a creditor might be threatening to repossess your car because of your failure to pay a car loan, but after the automatic stay kicks in the repossession process will be stopped dead in its tracks. The purpose of the automatic stay is to give the bankruptcy debtor a break from the hounding of creditors and let them have a chance at a fresh start.
What Will the Automatic Stay Stop?
The automatic stay will protect debtors from many of the various ways creditors use to collect debts. Specifically, it will stop:
- Beginning or continuing judicial proceedings against the debtor
- Actions to obtain debtor’s property
- Actions to create, perfect or enforce a lien against a debtor’s property
- Disconnection of Utilities
- IRS tax levies/IRS seizures
- Wage garnishments
- Collection of overpayments of benefits from a governmental agency
Creditors will willfully violate the automatic stay can be sanctioned with damages, costs, attorneys’ fees and, under certain circumstances, even punitive damages. Once a creditor has notice of the automatic stay, they must abide by it or face the consequences.
What Will the Automatic Stay Not Stop?
The power of the automatic stay is potent but not unlimited. There are several actions which the automatic stay will not stop. These include:
- Actions to collect child support or determine paternity.
- Actions to collect alimony.
- Criminal proceedings filed against the debtor.
- Evictions from residential rental property if the eviction order has already been signed.
- Suspension of driver’s licenses.
- Suspension of professional licenses.
- Assessments of taxes or audits.
Also note that the automatic stay is designed to protect only the debtor who has filed for bankruptcy. If there is a situation where such a debtor is a co-defendant alongside someone else, only the debtor will be protected from the lawsuit by the automatic stay. There are exceptions to this rule. Specifically, if a co-defendant is so closely related to the debtor such that a proceeding against the former would affect the bankruptcy estate, say for instance if the co-defendant were a wholly owned subsidiary of the debtor, then the co-defendant may be covered by the automatic stay as well.
There are also limits on the effectiveness of the automatic stay that kick in if you’ve filed for bankruptcy before. If you filed a bankruptcy that was dismissed by the court in the 12 months prior to filing another bankruptcy, the automatic stay is good for only 30 days. If you had 2 or more bankruptcies dismissed in the twelve months prior to filing another bankruptcy, there is no automatic stay. A court could still grant you an automatic stay if you file a motion setting out why you need one, but you’ll have to fight harder for it than you would have were this your first bankruptcy.
When Will Relief From the Automatic Stay be Granted?
The automatic stay doesn’t last forever and will end when:
- Your case is dismissed.
- Your case is discharged.
- You no longer choose to include or protect certain assets in your bankruptcy.
In certain circumstances, creditors can also request that the stay be lifted. For example, a creditor can request that the stay be lifted if the stay does not give them adequate protection in some property in which they have a significant interest. Determining whether their interest is significant enough depends on the property involved and the skill of the lawyers who are making arguments. If you decide to file for bankruptcy, it’s a good idea to retain a lawyer who can advise you on how best to make use of the automatic stay.