The Automatic Stay in Bankruptcy
Those who find themselves struggling financially are often the unfortunate victims of creditor harassment and incessant phone calls. The calls can get so bad that families are often forced to leave their phone off the hook at dinner time.
By definition, bankruptcy involves waving the white flag in the face of insurmountable debt and it is partly for this reason that the bankruptcy code prevents continued collection attempts once a bankruptcy case has been filed. A powerful court-ordered injunction, called the automatic stay, prohibits creditors from suing, calling, foreclosing or initiating any other collection attempts while a bankruptcy case is pending. The minute your bankruptcy case is filed, debt collectors must immediately stop calling.
Those creditors that continue with collection activity are in violation of a court order and are subject to sanctions, damages and even an award of attorneys fees. Federal court is no place to mess around, creditors know this and in most cases honor the automatic stay. Bankruptcy, therefore, can provide the consumer with a much-needed break from creditor harassment.
How Long Does the Automatic Stay Last?
In the case of a chapter 7 bankruptcy, the automatic stay will last for the duration of the case, usually 3 to 4 months, or until a creditor seeks to have it lifted. Consumers need to be aware that the automatic stay does not last indefinitely. It is designed to freeze collection activity so that the bankruptcy court can make distributions to creditors according to the rules outlined in the bankruptcy code.
As you might’ve guessed, creditors are always looking for a way around the protections of the automatic stay. Secured creditors, such as mortgage lenders, often seek to have the automatic stay lifted when the debtor is behind on their mortgage. As many of you know from reading this blog, monthly mortgage payments must be maintained as usual during a chapter 7 bankruptcy, if it is the debtor’s desire to keep their home. If payments are not made in a timely fashion, the bank can still foreclose despite the filing of a chapter 7 bankruptcy. A motion for relief from stay will be filed with the court seeking to allow the bank to foreclose. In many cases, this motion will be granted, and foreclosure will commence even before the bankruptcy case is closed. Therefore, it is important for bankruptcy debtors to understand the timing limitations of the automatic stay and formulate a strategy with their attorney accordingly.
What About Chapter 13 Bankruptcy?
In a chapter 13 bankruptcy case, the automatic stay lasts quite a bit longer than in chapter 7. Remember, the automatic stay will last as long as the bankruptcy does. In chapter 13, this means that creditors will be kept at bay for a period of between 3 to 5 years. As with chapter 7, creditors can seek to have the stay lifted, but will need a good reason for doing so. Usually only in the case of a delinquent mortgage or car loan is the court likely to lift the stay.
How does the Automatic Stay Stop Foreclosure?
As we’ve discussed previously, the automatic stay prohibits all collection activity, foreclosure being no exception. As long as the bank receives proper notice of the bankruptcy case, filing bankruptcy can stop foreclosure even the day before the sale. Now as we’ve mentioned, the foreclosure will not be indefinitely stalled by bankruptcy as you’ll still be required to make payments in order to keep your home. Bankruptcy does not give you a free house.
What Else Can the Automatic Stay Do?
In addition to stopping the usual debt suspects such as lawsuits, collection calls and foreclosure, the automatic stay is also effective against eviction proceedings, utility disconnection and wage garnishment.
The Bottom Line
when bankruptcy attorneys refer to filing bankruptcy as a fresh start they’re not joking around. The bankruptcy code and the corresponding court system takes the automatic stay very seriously. Although it will not last forever, and will not solve every financial problem, injunction from the bankruptcy court carries weight. Creditor phone calls will stop while you figure out how to get your life back in order.
Photo courtesy of Bridget Ames.