Filing for bankruptcy is not for everyone. But it can be a great way to get out of debt. The “automatic stay”, a provision in U.S. bankruptcy laws, is activated by filing for bankruptcy.

The automatic stay stops harassment phone calls, nasty letters, and threats of lawsuits. It also holds debt collection responsible if they violate the injunction.

Even if it doesn’t qualify as debt forgiveness, the relief that debtors feel when facing devastating consequences such as wage garnishment and foreclosure can be significant.

An automatic stay is a provision of U.S. bankruptcy laws that prevents creditors, collections agencies, and government entities from pursuing debtors to collect money.


Key Takeaways 

  • A bankruptcy filing automatically stops creditors from collecting debts until the court case is over.
  • The debtor can sue creditors, collection agencies, and other parties who violate the automatic stay.
  • If the assets of the debtor are likely to decrease in value before the case has been resolved, creditors can ask the court to lift the automatic stay.


Purpose of the Automatic Stay

Both creditors and debtors are protected by the automatic stay. Its primary goal is to help the debtor. It gives the debtor a breather from the demands and pressure of creditors. The automatic stay gives the debtor an opportunity to deal with business issues and negotiate a reorganization plan without interference from creditors.

The automatic stay is generally beneficial to the group of creditors. The stay stops creditors from depleting the bankruptcy estate, by rushing to court or using “self-help remedies” to enforce their rights, at the expense of other creditors. The automatic stay allows for an orderly administration, which promotes equal distribution.


How an Automatic Stay Works

Section 362 of the US Bankruptcy Code initiates an automatic stay upon a debtor’s bankruptcy filing, shielding individuals and businesses across all bankruptcy chapters. Non-debtor entities like corporate affiliates, officers, and co-defendants aren’t covered by this provision. The automatic stay safeguards debtors from creditor actions such as lawsuits, property foreclosure, lien creation/enforcement, and collateral repossession.

Debtors can take legal action against creditors who persistently contact or sue them post the automatic stay. This stay’s benefits greatly influence a debtor’s bankruptcy decision. It aims to ensure equitable treatment of creditors and prevent one from seizing assets ahead of others. Creditors, upon activation of the stay, receive a portion of the debtor’s limited assets, often less than owed.

Creditors can request court permission to lift the stay and resume collection efforts, which the court can grant for valid reasons like insufficient real estate protection. This occurs when the value of secured property diminishes during bankruptcy. The stay can also be lifted if a property isn’t directly owned by the debtor or isn’t part of the bankruptcy restructuring.


What Debts Are Exempt From Automatic Stay?

Some debts, such as child support and alimony payments, are not covered. These include child support, alimony, and money owed in a criminal case. 1 The Internal Revenue Service can still seize the debtor’s refund.

How Long Is an Automatic Stay?

The automatic stay continues as long as bankruptcy proceedings continue and ends if the case has been dismissed. The duration of the stay depends on whether the collection action is directed at the debtor or their property. The length of the stay can also be affected by the type and duration of the bankruptcy. For example, Chapter 13 cases tend to last longer than Chapter 7.

The number of bankruptcy cases in which the debtor has been involved is another factor. Serial filings are the term used to describe having more than one bankruptcy pending at a time. Some debtors, for example, will file for Chapter 7 and then follow it up with a Chapter 13 bankruptcy filing. 

The automatic stay in a case that a debtor had pending for the past year will only last 30 days unless the court extends it. If a debtor had two cases pending in the past year, no automatic stay would be in effect when the third case was filed. This is unless the court agreed to extend it.

Example of an Automatic Stay 

Samantha’s Art Studio had been grappling with financial troubles for some time. She found herself falling behind on mortgage payments, credit card bills, and various loan obligations, accumulating a total debt of $170,000. Seeking a solution, Samantha filed for Chapter 7 bankruptcy, which triggered an automatic stay, halting relentless calls from debt collectors.

However, Samantha’s creditors were not deterred and sought relief from the automatic stay. Her art studio was strategically situated in a burgeoning district, making it an enticing prospect for her lenders to either lease or sell. Samantha presented her case to the court, demonstrating her inability to upkeep the property due to her deteriorating financial state.

After evaluating the specifics of Samantha’s situation, the court granted her creditors relief from the automatic stay. Consequently, they regained control of the art studio, allowing them to explore avenues to minimize their losses in light of Samantha’s bankruptcy.


What is Chapter 7 Bankruptcy?

Among the various bankruptcy options, Chapter 7 stands out as the most prevalent choice for individuals with heavy financial burdens. In contrast with Chapter 13, the other common individual bankruptcy route, Chapter 7 offers a distinct approach. In this process, a trustee is appointed to oversee the liquidation of numerous assets, with the resulting funds channeled toward repaying creditors. Following this, the debtor is granted relief from remaining debts, providing a much-needed fresh financial beginning.


What is Chapter 13 Bankruptcy?

In contrast to the asset liquidation characteristic of Chapter 7 bankruptcy, Chapter 13 offers individuals the opportunity to retain more of their assets. While retaining possessions, the debtor commits to a structured repayment plan, spanning a period typically lasting between three to five years. This route enables debtors to gradually settle their obligations while retaining ownership of essential assets, offering a balanced approach for those seeking financial recovery without complete asset forfeiture.


What Is an Administrative Freeze?

In tandem with the automatic stay triggered by a bankruptcy filing, financial institutions can employ an administrative freeze. This strategy prevents depositors from withdrawing funds from their accounts when the bank itself owes them money. Interestingly, this freeze can be initiated while the automatic stay remains in effect, showcasing the complex web of financial safeguards that come into play during bankruptcy proceedings.


The Bottom Line

One of the core benefits of filing for bankruptcy is the automatic stay, a legal provision that effectively shields debtors from creditor actions. This protection prevents most creditors from pursuing debt collection efforts during the bankruptcy process. However, debtors possess the right to take legal action against creditors who flout the constraints of the automatic stay, ensuring that their legal rights are upheld even in times of financial distress. Call Bruner Wright now for expert legal assistance!

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