The moment a debtor files for bankruptcy, the automatic stay goes into effect. This important protection puts an immediate stop to most debt collection efforts, including phone calls from creditors, wage garnishments, and even repossession and foreclosure proceedings.
However, the protection of the automatic stay can be limited. Not every type of debt is covered by the automatic stay. And, those who have previously filed for bankruptcy can lose the protection of the stay.
Benefits of the Automatic Stay
The automatic stay prohibits most creditors from taking any steps to collect their debts while the bankruptcy case is proceeding. This gives the debtor some breathing room. It also gives the bankruptcy court an opportunity to assess the debtor's financial situation, decide which property the debtor should be able to keep or have to give up (or, in a Chapter 13 case, how much income the debtor should have to devote to a debt repayment plan), and ultimately decide which creditors will be repaid and how much.
The automatic stay puts a stop to:
- phone calls, letters, and other communications from creditors
- repossessions of cars and other property
- collection efforts for credit card debt, medical bills, and court judgments
- foreclosure proceedings
- utility disconnections (for at least 20 days), and
- most wage garnishments.
Creditors who are trying to collect debts that can be discharged (wiped out) in bankruptcy, such as credit card debt, will be stopped permanently by the automatic stay. They will have to stop collection efforts, then the underlying debt will be wiped out in the bankruptcy proceeding. Once the bankruptcy case ends, there will be no debt left to collect on.
For secured debts -- debts for which property, such as a house or car, serves as collateral -- the rules are a bit different. The automatic stay will prohibit collection efforts during the bankruptcy case. However, although the debtor's obligation to repay the debt may be wiped out in bankruptcy, the creditor's lien (legal claim) on the property will not. As part of the bankruptcy case, the debtor will have to decide how to handle these debts (for example, by giving back the property or agreeing to pay the creditor what the property is worth). So, the automatic stay is only a temporary solution to secured debt problems.
When the Automatic Stay Doesn't Apply
The automatic stay does not protect the debtor from all creditors. For example, most proceedings to collect tax debts may continue despite the stay. The same is true of most criminal proceedings and efforts to collect child support and alimony. (This includes wage garnishments for family support obligations; see Can Bankruptcy's Automatic Stay Stop Wage Garnishments?)
The automatic stay also won't stop eviction proceedings, if the landlord already has a judgment of possession against the tenant when the tenant files for bankruptcy.
Debtors who have already filed for bankruptcy in the past year could lose the protection of the stay. Those who have had one case pending in the past year will lose the protection of the stay after 30 days; those who have had two pending cases in the past year will never be protected by the stay. In either case, the debtor can file a motion asking the court for the protection of the stay. However, the debtor will have to prove that he or she acted in good faith in filing repeatedly for bankruptcy, a tough standard to meet.
Consequences for Violating the Automatic Stay
A creditor that violates the automatic stay will face actual damages for the harm caused by the violation. The court also has the discretion to award punitive damages if the behavior is especially egregious. To be subject to damages, however, a creditor's violation of the stay must be willful. This is not always the case. For instance, after the debtor files the bankruptcy petition, it will take a few days for the bankruptcy trustee to send out notices to all of the debtor's creditors and inform them of the stay. During this window, a creditor might contact a debtor unaware of the bankruptcy filing. If this happens, the debtor should immediately inform the creditor about the bankruptcy case and invoke the protection of the stay.
Lifting the Automatic Stay
A creditor who wants to proceed with collection actions during a bankruptcy case can file a motion to "lift" the stay. A court might grant this type of motion if the collection action is certain to happen eventually, regardless of the bankruptcy case. For example, a creditor might be allowed to continue a foreclosure proceeding if it can show that the debtor has no equity in the home and the foreclosure is a foregone conclusion.
If you have questions about which debts and collection efforts are subject to the automatic stay, or if you are facing a creditor's motion to lift the stay in an ongoing bankruptcy case, you may want to consult with an experienced bankruptcy attorney.