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.
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.”
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.
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:
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.
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:
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.
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:
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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