Automatic Stay in Bankruptcy

As soon as you file for bankruptcy you will be given something known as an automatic stay. This is true for both Chapter 7 and Chapter 13 bankruptcy and it will prevent creditors from filing civil lawsuits against you. It’s one of the reasons over 600,000 Americans file for bankruptcy every year and is a compelling reason to file.

However, an automatic stay won’t always work and it doesn’t cover you against all eventualities. In this guide, we’ll look at the things that an automatic stay in bankruptcy can and can’t prevent, while also discussing if it’s worth filing so you can benefit from an automatic stay.

When Does an Automatic Stay Begin and End?

An automatic stay begins the moment that the debtor files a bankruptcy petition. The bankruptcy case may take several weeks or months to complete and this process can be delayed by court issues and adversary proceedings. However, the stay will begin immediately, halting your creditors in their tracks.

The automatic stay will take effect even if the case is eventually dismissed and it’s possible for debtors to file multiple times after being dismissed. However, there are rules regarding how long this process takes for multiple filings.

If the debtor has had a case dismissed within the last year, the automatic stay will remain in effect for 30 days. If they have been dismissed two or more times, there will be no automatic stay.

What Can an Automatic Stay Prevent?

An automatic stay provides a certain level of protection. The idea is that many individuals filing for bankruptcy will have creditors on their backs and could be in serious financial trouble. Bankruptcy can help them with this and remedy their issues, so the automatic stay is the leveler that puts a halt to most activity so that the bankruptcy process can begin.

Disconnection

Utility companies will cut you off if you don’t pay your bills. You could find yourself without gas, electricity, and even water. If you file for bankruptcy, however, the automatic stay will prevent all of this and ensure there are no disconnections for at least 20 days.

A utility provider may cut your supply if the bill has not been paid for 45 days, but they may also contact the customer before this time to discuss repayment options. 

Foreclosure

An automatic stay can provide some relief if your home is being foreclosed on. However, depending on the type of bankruptcy you’re filing for, this relief might be temporary. 

If you’re filing for Chapter 13, you can keep your home by arranging a repayment plan with your lender. This plan typically lasts 3 to 5 years and will allow you to keep your assets and repay most of your debts.

With Chapter 7, you may lose your home if you’re behind with the payment. In this case, the automatic stay will simply delay proceedings. You can discuss your options with a bankruptcy attorney to find a solution that works for you and allows you to keep valuable assets such as your home.

Wage Garnishment

An automatic stay should stop all wage garnishments. If these garnishments are the result of unpaid unsecured debts, they may be discharged during a Chapter 7 bankruptcy or restructured with Chapter 13. However, you can’t discharge tax debts, child support or alimony.

Collection of Overpaid Benefits

If you were overpaid public benefits, the agency may collect the money by reducing future payments or requesting it directly. An automatic stay will stop this.

It cannot, however, prevent your benefits being stopped if you are no longer eligible to receive them.

What Can’t an Automatic Stay Prevent?

An automatic stay won’t save you from all creditors and all demands, just like a bankruptcy won’t cover you against all debt. 

Eviction

An automatic stay can help if you’re being evicted, but this help will only be temporary and there are limits. If the landlord has a judgment of possession, there’s nothing that the automatic stay can do and the landlord can simply continue as normal.

The landlord can also allege that you are endangering the property or committing illegal acts, in which case there’s nothing the automatic stay can do. In the event that it does delay things, that delay may only last for a few days or weeks, as the landlord can request that it be lifted.

Tax Issues

There is very little that an automatic stay can do to help you if you are being audited or will soon be audited. The IRS can still demand a tax return or assessment and they can still demand payment for that assessment, but the automatic stay may temporarily prevent them from issuing a lien or making a seizure.

Tax debts are also difficult to discharge during bankruptcy and you may still be responsible for it. 

Child Support and Alimony Debt

Any action filed against you regarding alimony or child support will not be stopped by the automatic stay. The same applies to the bankruptcy itself—these debts cannot be discharged and you will be responsible for repaying them in full.

Criminal Proceedings

An automatic stay won’t prevent the debtor from serving jail time, doing community service or paying a fine. The debtor is legally obligated to meet the terms of the sentence, even if those terms mean paying a fine that they can’t really afford.

Is it Worth Filing to Get an Automatic Stay?

You shouldn’t file for bankruptcy just because you want an automatic stay. In fact, in many cases, it simply won’t be beneficial. With utility companies, for instance, the size of the bill will rarely justify filing for bankruptcy. What’s more, as we have discussed in our guide to bankruptcy, filing isn’t a guarantee of success.

The bankruptcy court can refuse your case and if they believe you haven’t made an effort to repay your debts and are simply looking for an easy way out, they will refuse it. Bankruptcy is not the easy escape route that many people believe. 

The courts are not there to give you what you want. They will take a detailed look at your case, including your debts, finances, and credit history, and if they determine that you haven’t tried hard enough or have other options yet to be considered, they will dismiss it.

As helpful as an automatic stay can be, it should never be the sole reason for you to file because if it is, that filing will probably be dismissed.

Lifting the Automatic Stay

It’s possible for a creditor to have the automatic stay lifted. They simply need to file a motion with the bankruptcy court and request the continuation of their collection efforts. This is common with foreclosure, tenant disputes, and lawsuits taking place in other courts.

For this motion to be filed, the creditor needs to prove that the stay would cost them a sizeable chunk of money and would not impact other creditors in a big way. If you file for bankruptcy before your house enters foreclosure, the creditor will argue that they have the rights to your house, you agreed to give them those rights, and they stand to lose a lot of money if the stay is provided. In most cases, this will result in the stay being lifted and the house being foreclosed.

If you have any questions about this procedure, you can discuss them with your bankruptcy lawyer or read our many guides on the subject here at PocketYourDollars.com.

Summary: A Successful Bankruptcy Filing

If you have a lot of debt to clear then filing for bankruptcy could be the answer. The courts judge each bankruptcy case separately and will appoint a trustee to look over your debt, after which a bankruptcy judge will make a decision and will either discharge, restructure or dismiss.

The first step is to determine which bankruptcy code is right for you. You will then need to cover the fees of a bankruptcy filing, which are typically less than $500 in both instances, but can be greatly inflated when you hire the services of an attorney. 

Attorneys can charge up to $4,000 depending on the debtor and the chapter of bankruptcy being applied for. If there are any issues with the bankruptcy petition, these costs could run into 5-figures. However, lawyers are often worth their weight in gold as they can greatly improve your chances of a successful bankruptcy filing and ensure key assets are exempt and the right bankruptcy code is filed.