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How the Automatic Stay Stops Your Creditors

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
May 1, 2020

In this article, we discuss how filing for bankruptcy activates the automatic stay, what collections the automatic stay can and cannot block, how long the automatic stay lasts, what happens when creditors try to collect anyway, and what power creditors have to lift an automatic stay order.

When bills are mounting and creditors are all but knocking down your door it may feel like you can’t stop to take a breath, let alone figure out a plan to get out of debt. For many, filing for bankruptcy is appealing because they can erase their debt or restructure what they owe into a more manageable monthly payment. But possibly the biggest benefit of filing bankruptcy is activating the automatic stay. The automatic stay is a temporary court order or federal injunction that places an immediate hold against most lawsuits and/or collection actions being taking against you by creditors, certain government entities and collection agencies.

The automatic stay is activated when bankruptcy is filed. The automatic stay puts nearly all creditors and debt collection actions on an equal playing field and gives the filer a much-needed break as they work with a bankruptcy attorney on the best solution to their debt problems. However, an automatic stay order is not all powerful. Many types of collections will be temporarily put on hold, but there are exceptions; the timeframe also depends on the type of bankruptcy and the filer’s overall financial situation.

What Type of Collections the Automatic Stay Blocks

The automatic stay goes into effect as soon as bankruptcy is filed. The junction is binding in every court, jurisdiction, and proceeding and once active the court clerk will send letters to your various creditors within 24 to 48 hours. Both unsecured and secured creditors will receive the automatic stay notice and will be prohibited from collecting on debts incurred “pre-petition” (before filing). Any debt accumulated from new sources after filing, “post-petition,” is fair game. There are exceptions to what the automatic stay can block, which we will cover later in the article, but below is a list of the “stayed actions.”

  • Home foreclosure. What happens to your home after the automatic stay kicks in largely depends on the type of foreclosure. In Chapter 7 bankruptcy there is no protection for your home so you will most likely lose it and with it the payments. Chapter 13 allows you to keep your home if you can work out a repayment plan.
  • Vehicle repossession. Similar to home foreclosure you may not be able to keep your current vehicle under Chapter 7 bankruptcy (although you are much more likely to have some kind of vehicle after the process is finished).
  • Utility disconnections (Usually not more than 1 month). The automatic stay will block the utility company from shutting off your benefits for at least 20 days. However, you may be required to pay an initial deposit after filing bankruptcy to ensure future payments to your utility provider.
  • Credit card collections.
  • Attempts to obtain property from or control your bankruptcy estate.
  • Eviction. The automatic stay will usually buy you a few weeks to a month on your eviction order, but if the eviction proceedings were started before filing for bankruptcy the landlord and proceed with the eviction as if nothing has changed.
  • Collection of over-payment of public benefits. If your public benefits were overpaid the agency can typically collect from future payments on that overpayment (or from you directly if the benefits payments have stopped, but the automatic stay will block this collection. 
  • Multiple wage garnishments. Wage garnishments for whatever reason such as credit card debt, personal loan debt, and some federal debts will be frozen immediately and you will begin to take home your full salary. However, certain obligations such as child support and alimony will not be frozen or forgiven through bankruptcy

The automatic stay also works to block or slow certain legal proceedings that start prior to filing, collection on judgments made prior to filing, creditors attempt to balance debt with you (exercising Setoff Rights), new liens on property of the bankruptcy estate, and liens securing a pre-petition state.

What Type of Collections the Automatic Stay Does Not Block

It’s important to understand that the automatic stay is not a catch-all. It won’t stop every category of debt collection so it’s best to familiarize yourself with what types of collections and actions are exempt from the automatic stay:

  • Collection attempts on debt incurred after filing
  • Lawsuits initiated after filing
  • Actions establishing paternity and potential child support payments
  • Actions to establish child support agreements, visitation rights and/or custody
  • Criminal investigations and proceedings
  • Divorce proceedings
  • Alimony and spousal support
  • Eviction proceedings started prior to filing, or if you have endangered the property
  • Certain tax proceedings
  • Actions from multiple bankruptcy filings

This list is not exhaustive, there are a number of actions and collections that are not blocked by the automatic stay. If you’re unsure about your situation or don’t see something on this list that you think applies or does not apply you should speak with a qualified bankruptcy attorney.

How Long Does the Automatic Stay Last?

Generally, the automatic stay will last for the duration of the bankruptcy proceedings; about 3 to 4 months for Chapter 7 bankruptcy and 3 to 5 years for Chapter 13 bankruptcy. During this process, most of your nonessential assets will be sold off in Chapter 7 to pay debts and your debt restructured in Chapter 13. There are certain circumstances that affect the duration of the automatic stay, these include:

  • A creditor seeks to lift the automatic stay through the court and the court does not respond within 30 days causing the automatic termination of collection halting for that creditor. If this happens you should contact your attorney immediately.
  • If you’ve filed for bankruptcy twice in one year, with the first bankruptcy petition being dismissed, the court assumes the first bankruptcy was filed in bad faith, or fraudulent activity was suspected but not tried in court. In this case the second bankruptcy will only last for 30 days unless it can be proven by you, the trustee, or a creditor that the stay should remain in effect for a normal period of time and that your current filing is not in bad faith.
  • In the case of an individual filing followed by a joint filing with a spouse (if the first individual bankruptcy was dismissed) the automatic stay will only last 30 days for the individual (who is now technically filing his or her second bankruptcy petition), but will last a normal amount of time for the spouse.
  • If you attempt three filings in one year the court assumes the previous two filings were made in bad faith and the automatic stay will not be activated.

What Happens When Creditors Try to Collect During an Automatic Stay

Assuming that the creditors have received the automatic stay notice form the court clerk, trying to collect during this time is considered a violation of the automatic stay and punishable by law. Any creditor who violates the automatic stay can face orders for contempt, sanctions, damages or some combination of all three. If a creditor continues to harass you during bankruptcy proceedings and they are not on the list of exemptions contact your attorney immediately.

Can Creditors Lift an Automatic Stay Order?

Creditors can overcome an automatic stay by filing a motion for relief asking the court to allow them to continue to collect on the debt. Motions to lift an automatic stay usually involve a foreclosure order, dispute between a landlord and tenant and a lawsuit involving another court. The creditor asking for the stay to be lifted must prove his or her case in court. 

Once a creditor files a motion for relief to lift the automatic stay, the debtor (or anyone else with an interest in the case, such as another creditor who does not want filing creditor’s debt to gain priority) can provide opposition to the motion in court and make his or her case. The judge will usually rule in favor of the creditor in the following situations:

  • You have no financial means to keep the property;
  • For Cause. This is the most common reason for an automatic stay to be lifted and usually constitutes bad faith or a failure to secure adequate protection of the property being used as collateral;
  • The property has no equity that can be used to pay creditors;
  • Just about all properties can be subject to a lien in bankruptcy that gives the creditor the right to recover the home, sell it and use the proceeds to pay off the mortgage debt; and
  • It is in the best interest for the creditor to file a motion of relief as quickly as possible as the longer the bankruptcy goes on the less likely the creditor will be able to recover funds from the debtor. 

There are a number of other reasons a creditor may file a motion to lift an automatic stay. Your attorney can advise you on how best to handle these situations and if it comes to litigation having a good bankruptcy attorney can save you from a lot of frustration and stress.

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