The Automatic Stay Stops Creditor Collection Activity in Its Tracks

For the Debtor, one of the most powerful benefits of filing for Bankruptcy is the ‘Automatic Stay’. In technical terms, the definition and effect of the stay can be found in the Bankruptcy Code at 11 USC section 362(a). In real terms, the bankruptcy stay does what its name implies. It automatically stays or stops all collection activity by creditors against the debtors.

With very limited exceptions, the stay applies to all entities. Certainly normal harassment collection calls and letters must stop. Lawsuits to collect on overdue debts must stop, as well. The automatic stay goes further, however. Collection on taxes must stop. Collection on student loans must stop. Collection by way of an earnings withholding order or other forced collection method must stop. Any pending foreclosure on real property or any pending repossession of an automobile or other collateral must stop, too.

The Stay is Not Permanent

While the automatic stay is initially very helpful, it is not permanent. In Chapter 7 ‘straight’ bankruptcy, for instance, the stay ends upon completion of the case, which can be as short as 3 months. The stay can also be ‘relieved’ or lifted, upon the appropriate request by a creditor when papers are filed with the Bankruptcy Court. For example, in a Chapter 13 ‘repayment plan’, a creditor may ask that the stay be lifted if the plan payments are not made.

The stay can also be automatically lifted in certain circumstances. Occasionally, a creditor might inadvertently violate the automatic stay. Or, sometimes, the violation is intentional, which can result in penalties against the offending creditor. The analysis of the automatic stay, and how it applies in your individual case, whether exceptions exist, and the relative benefits, thus requires the assistance of a skilled attorney to properly advise of the pros and cons. This is especially true after the ‘new’ bankruptcy laws were enacted in Oct. of 2005.

John C. Colwell, San Diego Bankruptcy Attorney