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Aside from discharging debts, the automatic stay is perhaps the single biggest reason why people file bankruptcy. And people who do not know about the automatic stay are truly relieved when they learn about it. So, just what is the automatic stay in bankruptcy, what does it do, and how does it work?
When ever anyone files bankruptcy, whether under Chapter 7, Chapter 13, or another Chapter of the bankruptcy code, there is an automatic stay (stopping) of certain actions by creditors. The stay is automatic, meaning that the person filing bankruptcy does not have to apply for the stay. The automatic stay becomes effective immediately upon filing bankruptcy. There is not a lag time. If a creditor’s actions are covered by the automatic stay, the creditor must stop the actions immediately.
The automatic stay is found in 11 USC 362 and is very detailed and specific. In broad terms, the bankruptcy automatic stay stays or stops most civil actions such as foreclosures and law suits as well as staying or stopping creditor actions to collect debts. Creditor actions that are stopped include phone calls and other contact aimed at collecting a debt.
In other words, when you file bankruptcy, creditors must stop calling you, contacting you, and must stop most civil actions to collect money or recover secured property. This doesn’t mean that creditors can never take any action because, as discussed below, creditors may ask the bankruptcy court to lift the stay.
Notice: The automatic stay does not stay or stop every creditor and all actions. The bankruptcy code is detailed and list a number of exceptions to the automatic stay. The following is a list of some actions that are not stayed or stopped by a bankruptcy, but it is not a complete list. Some common actions that are excluded or excepted from the automatic stay are:
- Criminal actions or proceedings against the debtor.
- The commencement or continuation of a civil action or proceeding to establish paternity, to establish or modify an order for domestic support obligations, to deal with custody or visitation, to dissolve a marriage except to the extent that such proceeding seeks to divide property, and domestic violence.
- The withholding, suspension, or restriction of a driver’s license, a professional or
occupational license, or a recreational license, under certain circumstances.
- The interception of a tax refund under certain circumstances, the issuance to the debtor by a governmental unit of a notice of tax deficiency, and a demand for tax returns.
As you can see, common exceptions to the automatic stay in bankruptcy involve criminal,
domestic/family support, and income tax matters. Again, the bankruptcy code contains details for each of the above stated exception as well as other exceptions.
The bankruptcy automatic stay does not last forever. Depending on the circumstances and the facts of the bankruptcy case, a creditor may ask for relief from automatic stay by asking the bankruptcy court to lift the stay, meaning that the creditor can proceed with its’ actions. Normally, the bankruptcy court will not lift the stay to allow an unsecured creditor to take action. However, the bankruptcy court will usually lift the stay to allow a secured creditor to seek possession of property such as allowing a mortgage holder to proceed with foreclosure as long as the creditor is not seeking money from the debtor.
Aside from the automatic stay being lifted in certain situations, the automatic stay will end as to certain property when the property is released from the bankruptcy. For example, in a Chapter 7 bankruptcy, if you do not have enough equity in your home for the bankruptcy trustee to sell your home, he will release your home from the bankruptcy and the mortgage holder will be able to proceed with foreclosure if you are behind with your payments.
If the stay is not lifted earlier, the automatic stay will end when the bankruptcy case is closed or dismissed, or a discharge of debts is granted to the debtor.
If a bankruptcy case is dismissed prior to a discharge of debts being granted to the debtor, then a creditor can proceed with actions to collect. Basically, this means that a debtor did not complete the bankruptcy. And since the bankruptcy was not completed, it is sort of like the bankruptcy never happened and the creditor can seek collection.
If a discharge of debts was granted to the debtor, then creditors cannot proceed with actions to collect on unsecured debts covered by the bankruptcy. For example, if you owe money to ABC and you have listed ABC in your bankruptcy, ABC cannot seek to collect the money because it was discharged in the bankruptcy. However, if you borrow more money from ABC after the bankruptcy, ABC can take action to collect the debt that occurred after the bankruptcy.
For a copy of the automatic stay part of the bankruptcy code go to Cornell University School of Law Legal Information Institute and click on section 362.
This is general information only. If you have any questions whatsoever, talk with a lawyer licensed in your state who has experience with Chapter 7 bankruptcy, Chapter 13 bankruptcy, or bankruptcy in general.
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