How the Automatic Stay Protects You
The automatic stay is a court order which takes effect the moment you file for bankruptcy. It is a court order which prohibits any creditor from taking any action against you, the debtor, or your property. The word “action” refers to any attempt to collect upon a debt: everything from harassing phone calls, to wage garnishment, to lawsuits, to repossession, to threats of foreclosure or foreclosure proceedings themselves. The automatic stay immediately stops them all.
The automatic stay takes effect the moment you file bankruptcy. Even if your creditors have not received official notice of your filing yet, they must stop all collection actions the moment they learn of the filing.
The purpose of the automatic stay is to stop the accelerating downward financial spiral that serious debt ignites - and help stave off the quick actions and poor decision-making that the stress caused by out-of-control debt can bring. It stops more aggressive creditors from pursuing repayment, which may come at a cost to other creditors. It allows the debtor some breathing space: to stop dealing in moment-by-moment trouble-shooting, and to be able to come up with a plan. It brings the debtor and the debtor’s assets, and all of the creditors, into court together, so a plan that is based upon the big picture and that is fair to all can be devised.
What the automatic stay can do
The automatic stay immediately stops collection actions. Here are examples of some of the actions that the automatic stay halts:
- Stop foreclosure. The automatic stay immediately stops any foreclosure proceedings - although your lender will probably file a motion to seek relief from the automatic stay. You can often make that stop to foreclosure permanent by filing Chapter 13 bankruptcy and negotiating a repayment plan with you lender. Under Chapter 7, it may be more difficult to make that stop to foreclosure permanent, unless you are able to reaffirm your loan agreement. However, that temporary stop to the foreclosure proceedings can be valuable, perhaps allowing you to come up with the finds to make up your late payments to reinstate your mortgage and stop the foreclosure, or at least allowing you time to make arrangements for new accommodation.
- Stop utility disconnections. If your water, gas, electricity or telephone service provider is threatening to disconnect your service due to unpaid bills, the automatic stay prevents them from going ahead with that disconnection for at least 20 days.
- Stop or delay eviction. If you are a renter, the automatic stay may help you avoid or at least slow eviction. If your landlord already has a judgment of possession against you, filing bankruptcy will not affect the eviction proceedings: your landlord can continue with the process. But if there is no judgment, the automatic stay will prevent your landlord from taking action to evict you. (Note that in most cases a landlord will request and be granted relief from the automatic stay, so the stay generally just slows down the eviction process and buys you a little time, rather than stopping the eviction all together).
- Stop most wage garnishments. The automatic stay immediately stops wage garnishments from creditors other than the government. Since these garnishments may amount to up to 25% of your wage, if you have been struggling because you are not able to take home your full income, the automatic stay can immediately bring you back up to full wages.
- Collection of overpayments for public benefits. If you have been overpaid public benefits, normally these overpayments would be collected as deductions from your future checks. The automatic stay prevents the agency from making deductions for this purpose.
- Stops some IRS collection actions. While the automatic stay does not prevent the IRS from demanding payment from you, it does prohibit them from issuing a tax lien, or from seizing your property or your income.
What the automatic stay cannot do
There are, however, some collection actions that the automatic stay has no authority to stop, such as:
- Some IRS proceedings. The IRS can still demand a tax return, issue a tax deficiency notice, issue a tax assessment, or demand payment, and they can still audit you.
- Support actions. Any lawsuits against you related to establishing paternity, or collecting child support or alimony, are not stopped by the automatic stay.
- Criminal proceedings against you. Any non-debt component of a criminal proceeding against you cannot be stopped by filing bankruptcy.
- Loans from pensions. The automatic stay does not stop money being withheld from your income if it is to repay loans from certain types of pensions.
- Prior dismissed cases. As explained below, an automatic stay may be in effect for only 30 days, or it may not be imposed at all, if you have had a previous bankruptcy case dismissed within the last year.
Effects of prior dismissed cases
If you have had a bankruptcy case dismissed within the past year, the automatic stay lasts for only 30 days. If you have had two bankruptcy cases dismissed in the past year, there is no “automatic” stay.
You can file a motion with the court to request that a stay be imposed anyway. However, the court looks unfavorably on multiple filings, so if you want to request a stay, you must be prepared to demonstrate to the court that your current filing is not in bad faith.
Even if your automatic stay expires after 30 days, or never kicks in at all, your possessions at the time of filing are still protected. The difference between this type of bankruptcy protection and an automatic stay is that it applies only to your possessions at the moment of filing. For example, with an automatic stay imposed, your creditors may not garnish any of your wages after you have filed. Under bankruptcy protection, they may not garnish funds you had at the time of filing, such as money in bank accounts, but they can garnish wages or seek to possess property that you receive after filing.
Duration of automatic stay
Other than in the cases described above, where you have had a bankruptcy case dismissed within the last year, there is no specified amount of time that the automatic stay remains in effect. The automatic stay may be lifted as a result of:
- a creditor filing a motion to have the automatic stay lifted, and that motion being approved by the court (see below)
- an item of property being removed from the estate
- you receiving your discharge, or
- the case otherwise being closed.
In Chapter 7 bankruptcy, this means that a secured asset that has been exempted from the bankruptcy, such as your home, is protected from foreclosure until the automatic stay is lifted. If your lender files to have the stay lifted, and has the paperwork necessary to prove that they are the owner of your mortgage loan, this could be as little as one or two months. Otherwise you will be protected by the automatic stay up until you receive your discharge. The stay is lifted once you receive your Chapter 7 discharge.
Although your debt has been discharged, the lien against your home has not. This means that, if you are behind on your payments, your lender may still proceed with foreclosure. If you have remained current on your payments, your lender has no ground to foreclosure on you, as long as you continue to make the payments on time. We discuss this complex procedure, known as “riding through,” elsewhere on this site, in the article Decisions About Your Home and Mortgages in Bankruptcy.
In Chapter 13 bankruptcy, the automatic stay remains in place until the repayment plan has been completed, which is usually five or occasionally three years.
After you receive your discharge and the automatic stay is lifted, your exempted assets will be covered by a permanent injunction which prohibits your former creditors from ever attempting to collect on your discharged debts.
Motion for relief from automatic stay
A creditor can file a motion with the court to have the automatic stay lifted - in other words, to request “relief” from the automatic stay. If that relief is granted, that creditor can continue to proceed with collection actions on that debt.
Just the fact that one of your creditors has applied for relief from the automatic stay does not mean that the judge will grant them that relief. If they do request relief, you are entitled to a hearing in which the creditor must convince the court the reason that the stay should be lifted and that they should be allowed to continue to collect on the debt. In most cases, once a bankruptcy is filed, a court will choose to continue the protection that bankruptcy gives you.
The court will not lift a stay on debts that will be discharged through the bankruptcy - which accounts for most unsecured debts. The court may lift the stay on unsecured debts that will not be discharged, though, such as child support or spousal support.
Secured creditors may be granted relief from the automatic stay. That relief may be granted either if you have not been making your scheduled payments (for example, if you stopped paying your mortgage), or if the asset is considered to be “unprotected” (for example, that there is no insurance on that asset, or if it seems like that you will soon stop making payments).
Non-payment of rent and eviction
The bankruptcy court attempts to treat everyone as fairly as possible through the course of the bankruptcy case: both the debtor and the creditors. In the case of a renter who files bankruptcy, the landlord who they owe back-rent to is one of their creditors. The landlord will likely seek relief from the automatic stay because they will want to evict the debtor/tenant so they can get new, paying tenants in.
The bankruptcy court treats rent payments differently from most other debts, by separating the pre-bankruptcy back-rent owed, which is covered by the automatic stay, from the post-bankruptcy rent, which is not. The pre-bankruptcy rent is therefore a dischargeable debt which the landlord may not collect on. The post-bankruptcy rent is not covered by the automatic stay, so the landlord may try to collect it in spite of the automatic stay.
If the landlord has already obtained a judgment of possession of the premises prior to the tenant filing bankruptcy, they can still continue with the eviction process regardless of the automatic stay. If not, the landlord will likely seek to have the stay lifted. Although that will not allow them to collect on any back-rent owing, having it lifted will at least regain them the right to evict the tenant.
Read on for our next article in this series: Everything You Need to Know About the Means Test