How the Automatic Stay Protects Bankruptcy Filers

The automatic stay stops creditor collection actions, including foreclosures and wage garnishments, as soon as you file the bankruptcy case.

By , Attorney

If you're tired of being harassed by creditors—and we're pretty sure you are—bankruptcy can help. One of bankruptcy's most significant benefits is the automatic stay that goes into effect as soon as you file. But you'll want to know a few things, including that the automatic stay:

  • will stop creditor phone calls, wage garnishments, repossession and foreclosure, and collection lawsuits
  • won't stop all legal actions, and
  • doesn't always protect people who've filed for bankruptcy before.

We explain more below. To check for common issues in your bankruptcy case, try the ten-question bankruptcy quiz—it flags areas you'll want to look into further.

Automatic Stay's Purpose in Bankruptcy

Bankruptcy filers love that the automatic stay provides them with a break from annoying creditor calls. But that's not its real purpose. It prevents a creditor from scooping up a filer's assets leaving nothing for others. Stopping collection actions gives the bankruptcy trustee time to review the filer's finances, sell property, and distribute the proceeds amongst all creditors.

Collections Stopped by Bankruptcy's Automatic Stay

You won't be able to stop family law or criminal actions—and the stay won't help you if your landlord already has an eviction judgment against you. Still, the automatic stay puts a stop to almost all other activities a debt collector might use, including:

  • phone calls, letters, and other communications
  • repossessions of cars and other property
  • credit card, medical, and court judgment collections
  • foreclosure proceedings
  • utility disconnections (for at least 20 days)
  • most wage garnishments
  • evictions before judgment, and
  • other debt-collection lawsuits.

If the debt is the type that can be wiped out (discharged) in bankruptcy, such as credit card debt, you won't be bothered again. Your obligation will go away in bankruptcy. Nondischargeable debts must be paid after a Chapter 7 case. (Learn what happens to debt in Chapter 13.)

It's a bit more complicated if the creditor has the right to collateral—such as your home or car—if you don't pay as agreed. The lien, in this case, creates a "secured debt." You can erase a mortgage or car payment in bankruptcy, but the lien requires you to give the lender the property. If you want to keep it, you'll need to pay according to your contract or make other arrangements. Otherwise, the lender can use its collateral lien rights to recover the property.

So how will the lender know what you want to do? You'll complete a form letting the court and lender know what you intend to do with the property—for example, continue to make payments, give it back, or agree to pay the creditor what the property is worth (you'll find a link to the form in the "Navigating Bankruptcy" section below).

Lifting Bankruptcy's Automatic Stay

A creditor who wants to proceed with a collection action can file a motion asking the bankruptcy court to "lift" the stay. A court might grant this type of motion if the collection action will eventually happen, 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.

It's also common for a landlord to ask the bankruptcy court to lift the stay in an eviction proceeding. In most cases, the court will allow it, so using bankruptcy to stop an eviction will provide temporary relief, at best.

The court will also let state court lawsuits go forward in a variety of situations. Government enforcement actions involving nuisance abatement will likely be allowed to proceed. And a fraud lawsuit might continue in state court if the parties involved have already invested significant time and money. Why? Fraud judgments aren't discharged in bankruptcy. But first, a court or jury must decide that the fraud occurred. So rather than ask the parties to start over in bankruptcy court, the bankruptcy court will allow it to conclude in the original forum.

When the Automatic Stay Doesn't Apply

Some bankruptcy rules are in place to prevent debtors from using bankruptcy to avoid creditor payments. For this reason, a debtor who filed in the past year will lose the stay after 30 days. If the debtor had two previous cases within the last year, the stay wouldn't go into effect at all. In either case, the debtor can ask the court to issue or extend the stay. However, the debtor will have to prove that they acted in good faith in repeatedly filing for bankruptcy, which is a demanding standard to meet.

Automatic Stay Violations

Most creditors who contact you after you file for bankruptcy do so accidentally. All you need to do is give the creditor your bankruptcy case number and filing date, and it's unlikely you'll hear from them again. However, suppose a creditor intentionally violates the stay. In that case, a bankruptcy court has the power to order the creditor to pay an amount that will correct the harm caused by the violation. A bankruptcy lawyer can help.

Navigating Your Bankruptcy Case

Bankruptcy is an unusual area because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.

One way to keep track of your research is to use the bankruptcy forms as an outline. You'll find links to automatic stay-related bankruptcy forms and other resources in the chart below. You can also look at the list of Chapter 7 and 13 bankruptcy forms to see where this topic fits in the bankruptcy scheme (it's a prefiling issue). And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

Bankruptcy Automatic Stay Information

Bankruptcy Forms

The bankruptcy court tells creditors about the bankruptcy case using these forms:

Notice of Chapter 7 Bankruptcy Case

Notice of Chapter 13 Bankruptcy Case

You'll tell the court and creditors what you'd like to do with property securing debt with this form:

Statement of Intention for Individuals

Related Information

Exceptions to the Automatic Stay: Repeat Bankruptcy Filings

Can Bankruptcy's Automatic Stay Stop Wage Garnishment?

Need More Info?

If you're like most people, you've got more questions. We want you to find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.

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