By Attorney Stephen Elias
When you file for any kind of bankruptcy, the automatic stay goes into effect. The stay prohibits creditors and collection agencies from taking any action to collect most kinds of debts you owe them, unless the law or the bankruptcy court says they can. (To learn more about the automatic stay, see How the Automatic Stay Protects Bankruptcy Filers.)
In some circumstances, the creditor can file an action in court to have the stay lifted (called a Motion to Lift Stay). In others, the creditor can simply begin collection proceedings without seeking advance permission from the court.
The good news is that the most common type of creditor collection actions are still stopped dead by the stay—harassing calls by debt collectors, threatening letters by attorneys, lawsuits to collect payment for credit card and health care bills, and actions to recover property, such as car repossessions, home foreclosures, and wage garnishments. This article explains which collection actions are stopped by the automatic stay.
Anyone trying to collect credit card debts, medical debts, attorneys’ fees, debts arising from breach of contract, or legal judgments against you (other than for child support and alimony) must cease all collection activities after you file your bankruptcy case. They cannot:
Government entities that are seeking to collect overpayments of public benefits, such as SSI, Medicaid, or Temporary Assistance to Needy Families (welfare) benefits, cannot reduce or terminate your benefits to get that money back while your bankruptcy is pending. If, however, you become ineligible for benefits, including Medicare benefits, bankruptcy doesn’t prevent the agency from denying or terminating your benefits on that ground.
If a case against you can be broken down into criminal and debt components, only the criminal component will be allowed to continue. The debt component will be put on hold while your bankruptcy is pending. For example, if you were convicted of writing a bad check and have been sentenced to community service and ordered to pay a fine, your obligation to do community service will not be stopped by the automatic stay, but your obligation to pay the fine will.
Certain tax proceedings are not affected by the automatic stay. The automatic stay does, however, stop the IRS from issuing a lien or seizing (levying against) your property or income.
Foreclosures are initially stayed by your bankruptcy filing. However, the stay won’t apply if you filed another bankruptcy case within the previous two years and the court, in that proceeding, lifted the stay and allowed the lender to proceed with the foreclosure. In other words, the law doesn’t allow you to prevent a foreclosure by filing serial bankruptcies.
Even if this is your first bankruptcy, filing won’t stop certain time periods associated with a state’s foreclosure procedures from “running.” For example, state law might give a homeowner the right to two or three months’ notice before the home is sold. Once a homeowner receives advance notice of foreclosure, the home may not be sold until the notice period has ended. In these states, filing for bankruptcy won’t stop the notice period from elapsing. However, the sale itself can’t happen while you are in bankruptcy unless the foreclosing party gets permission from the bankruptcy judge by filing a motion to lift the stay.
If the lender moves to lift the stay and can show that even with the bankruptcy the foreclosure will ultimately occur, the court is likely to lift the stay. You may be able to successfully oppose the motion to lift the stay by challenging the lender’s right to file the motion because it cannot show proof that it owns the mortgage. But, even if you are successful in defeating the motion to lift the stay, in Chapter 7 bankruptcy, your victory will only last as long as your bankruptcy—typically only a month or two after the motion is heard.
However, in Chapter 13 cases, if you defeat the motion to lift the stay, you might be able to prevent foreclosure altogether.
Companies providing you with utilities (such as gas, heating oil, electricity, telephone service, and water) may not cut you off because you file for bankruptcy. However, they can shut off your service 20 days after you file if you don’t provide them with a deposit or another means to assure future payment. They can also terminate service if you fail to pay for it after you file.
Excerpted from How to File for Chapter 7 Bankruptcy, by Attorney Stephen Elias, Albin Renauer, J.D., & Robin Leonard, J.D. (Nolo).