The moment you file bankruptcy you and your property are protected from almost all collection attempts by your creditors.
The part of federal bankruptcy law called the “automatic stay” protects you from your creditors during a bankruptcy case.
The Law on Automatic Stay
The statute says that a bankruptcy “petition… operates as a stay, applicable to all entities.” In other words, the act of filing the initial bankruptcy document itself acts to stop all creditors. (See Section 362(a) of the Bankruptcy Code.)
But what does filing the petition stop your creditors from doing?
- Suing you, or continuing a previously filed lawsuit
- Enforcing a previously obtained judgment against you
- Taking possession of your property
- Creating or enforcing a lien against your property
- Acting in any way to collect a debt which is in existence at the filing of your bankruptcy case
The Point of the Automatic Stay
When Congress enacted the modern Bankruptcy Code in 1978—thirty-nine years ago—it said:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.
The automatic stay is actually designed for both your benefit AND that of your creditors. It helps your creditors by leveling the field among them. It discourages any of them from being overly aggressive, because the automatic stay assures them everyone will be treated fairly.
Without it, certain creditors would be able to pursue their own remedies against the debtor’s property. Those who act first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally.
Clifton R. Jessup, Jr., June 1995, American Bankruptcy Institute.
To preserve your property, both for yourself and potentially for your other creditors, the automatic stay must be very fast and apply to all kinds of collection efforts.
As stated above, the very filing of the bankruptcy “petition… operates as a stay, applicable to all entities.” It doesn’t take a judge’s order. In most circumstances creditors can’t prevent its protection from going into effect. The automatic stay is indeed automatic.
Has a Wide Scope
The automatic stay protects you and your assets in just about every possible way from aggressive creditors.
It stops all phone calls and letters from them, their garnishments and lawsuits, the imposition of liens. It covers “any act to collect, assess, or recover” a debt.
The automatic stay also stops vehicle repossessions and home foreclosures, stops the IRS from recording a tax lien, and creditors from suing you from getting a judgment and judgment lien. It covers “any act to create, perfect, or enforce any lien.” (Section 362(a)(2)-(6).
Where the Automatic Stay Does Not Apply
There are certain limited kinds of actions that are not stopped by the automatic stay. The main ones include:
- all criminal proceedings (which may or may not include traffic infractions and other relatively minor matters)
- family court matters involving child custody/visitation, paternity, domestic violence, marital dissolution other than property settlement, and most collection of child/spousal support.
Also, under certain circumstances you can lose your right to the automatic stay as to ALL of your creditors if you filed a recent bankruptcy case (or two) that was subsequently dismissed.
Creditor’s “Relief from Stay”
The automatic stay gives you relief from creditors’ collection actions. But a creditor can file a motion at bankruptcy court asking for relief from the automatic stay. That’s a request to undo its protection.
These motions are most commonly filed by secured creditors wanting to pursue their collateral. Sometimes creditors want to start repossessing the collateral. Sometimes they want to continue the action they’d started before the bankruptcy was filed. For example, creditors may ask for permission to start or continue repossessing a vehicle or foreclosing on a house. They tend to do so mostly when a debtor isn’t making payments as agreed.
In deciding whether to grant a creditor’s motion, the court weighs many possible factors. These often include your payment status, your intent and ability to make future payments, and the value of the collateral compared to the amount of the debt. (Section 362(d)-(g) of the Bankruptcy Code.)