An Automatic Stay in bankruptcy is the most powerful part of bankruptcy law.
What does the word “Stay” mean in bankruptcy? In short, it means almost all efforts to collect a debt, including garnishments, foreclosures, repossessions, lawsuits, or anything else even remotely associated with an attempt to take away your property, MUST automatically stop until further notice.
The Automatic Stay in bankruptcy is so powerful that even the IRS or other federal collection efforts, for example, collection on an SBA loan, is also included in the Stay.
What Activities Are Not Subject to the Automatic Stay?
Generally, there are just some commonsense exceptions to the Automatic Stay in Bankruptcy. A few examples include:
- Criminal court matters
- Establishment of paternity and child support (note: collections efforts of past due child support are Stayed)
- Child custody matters
- Tax audits and other enforcement efforts that are not directly connected to the collection of debt
A detailed list of the exceptions to the Automatic Stay can be found at 11 U.S.C. § 362(b). Yet, most actions are stayed and individuals needing bankruptcy protection almost always find the Automatic Stay extremely important and effective.
How Does the Automatic Stay work?
This is a very good question with a super simple answer: Just file a bankruptcy petition and, like magic, you automatically get a bankruptcy Stay which brings most collection efforts to an immediate screeching halt.
You don’t need to request the Automatic Stay because it is at once and automatically ordered by the Court. Even more powerful is that any collection effort that happens after the automatic stay is entered is null and void and the creditor must quickly undo their action.
For example, if a wage garnishment order has already been received by an employer and your wages are in route to the creditor, they must be returned promptly.
Another example concerns mortgage foreclosures. If your home is being foreclosed and a bankruptcy is actually filed before a sale occurs, but the lender isn’t aware of the bankruptcy, it doesn’t matter, the sale must be undone.
Relief From the Automatic Stay – How long Does it Last?
Ordinarily, the Automatic Stay only lasts as long as the bankruptcy is open. Creditors do not like the Automatic Stay because it prevents them from their collection efforts, whatever they may be.
However, there are conditions in which the Bankruptcy Court will “lift” (or remove) the automatic Stay. If the debtor in bankruptcy puts a creditor’s collateral at risk or if irreparable harm may be inflicted on the creditor without having the Stay lifted, then a creditor will file a Motion for Relief from the Automatic Stay. If a logical and convincing argument can be made to the Court, an Order Lifting the Automatic Stay will be entered.
The question then becomes what happens after the automatic stay is lifted? In essence, the creditor may take steps according to the specific relief sought in their Motion. If the creditor desires to foreclose on a house and they are granted relief from the stay, then the creditor can do just that.
However, normally the relief from stay is limited to taking a specific action, not wholesale permission to personally collect against the debtor. In the above house example, the creditor may only sell the house and apply the proceeds to the loan, but they may NOT collect against the debtor personally, such as with a lawsuit for money.
Automatic Stays in Chapter 7 vs Chapter 13
The automatic stay in bankruptcies act universally regardless of what type of bankruptcy is filed. That said, Relief from the Automatic stay Motions are much more common in Chapter 13 cases because they last from 36 to 60 months, as opposed to a Chapter 7 case, wherein the automatic stay only last for approximately 3 to 4 months (until the case is discharged).
In Chapter 13, many different types of default by the debtor tend to occur over a longer time, such as not being able to make your house or car payment regularly, causing the creditor potential damage to their collateral.
What Are the Consequences of Violating (or Ignoring) the Automatic Stay?
Not good! If a creditor intentionally violates the Automatic Stay, then they subject themselves to punishment by the Court, which could include not only undoing what they did, but they also are likely to be sanctioned with a fine and/or some other more severe penalty decided by the Court.
An accidental violation of the Automatic Stay can sometimes result in penalties as well, but common sense and reasonableness also come into play.
So long as the creditor makes things right, then usually there aren’t any severe consequences. With stubborn creditors that refuse to promptly fix their error, the debtor’s attorney will normally file a Motion for Sanctions for Willfully violating the automatic stay seeking sanctions and attorney fees.
The bankruptcy automatic stay is one of the most powerful and far reaching federal laws with enormous and immediate power and is effective against the most difficult of collection activities. While this is true, an attorney who focuses his or her practice on bankruptcy law will be able to quickly advise an individual that needs help and fast!
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If you are faced with debts you cannot afford to pay, and especially if you are being threatened with serious consequences like foreclosure or wage garnishment, you owe it to yourself to learn more about your bankruptcy options. Because our practice is focused exclusively on bankruptcy law, our knowledgable bankruptcy lawyers are devoted to helping people understand their rights and file for bankruptcy if you choose to do so. Request a free consultation to get started.