Bankruptcy Automatic Stay: How It Works, Tips & More
The automatic stay in bankruptcy is a temporary federal injunction that immediately stops most collection efforts by creditors, collection agencies and government entities against debtors and their property. It is one of the most beneficial features of bankruptcy, putting creditors on equal footing in regard to their claims and providing debtors temporary reprieve from aggressive collection activities as they seek to restore their financial standing.
But an automatic stay has its limitations. While a powerful tool that can help those in difficult financial straits, it does not extinguish debts. It merely suspends efforts to collect or proceed against those debts while a bankruptcy case is open. Nevertheless, in the most desperate situations, this immediate benefit of an automatic stay can be enough to motivate debtors to file for bankruptcy in order to quickly relieve themselves of hardship.
In this comprehensive guide, you will learn how the automatic stay works, the ways in which it helps debtors and what you can do to get the most out of it.
Actions Subject to the Automatic Stay
As soon as you file a bankruptcy petition, the automatic stay will suspend a variety of collection activities against you while you rehabilitate your finances or reorganize your debts. The injunction is binding in every court, jurisdiction and proceeding and can be especially beneficial if you are facing harassment from creditors. All secured and unsecured creditors are barred from collecting against “pre-petition” debts, or those you incurred before filing for bankruptcy.
However, the protective attributes of the automatic stay do have limits. There are a variety of exceptions, as you’ll see below, including the ability of collectors to recoup “post-petition” debts.
|Home Foreclosure||Vehicle Repossession|
|Utility Disconnection (for at least 20 days)||Attempts to Obtain Property From or Control Your Bankruptcy Estate|
|Most Evictions*||Collection of Benefit Overpayments That You Did Not Return (e.g., welfare payments)|
|Collection Attempts on Debts You Incurred Prior to Filing (including phone calls, demand letters and invoices)|
*Unless a judgment against you was issued prior to filing or your landlord claims you have endangered the property or used a controlled substance within the premises.
In addition to halting the major activities mentioned above, the automatic stay also curtails the following:
- Commencement or continuation of litigation proceedings that started prior to filing.
- Collecting on judgments made prior to filing (including garnishments, levies, restraining orders and post-judgment collection remedies)
- Attempts to Exercise Setoff Rights on Debts You Incurred Prior to Filing (setoff is the right of a creditor to balance its mutual debts with you; i.e., both you and your creditor owe money to each other and your debt will be reduced to offset the amount your creditor owes you)
- Creation, Perfection or Enforcement of New Liens on Property of the Bankruptcy Estate.
- Creation, Perfection or Enforcement of Liens Securing a Pre-Petition Claim
Actions NOT Subject to the Automatic Stay
The automatic stay is not omnipotent. It does not cover every legal or financial issue that comes your way. You should therefore familiarize yourself with the following exceptions so that you’re not operating on any misguided assumptions.
|Actions Not Stayed (Exceptions)|
|Collection Attempts on Debts You Incurred After Filing||Lawsuits Initiated After Filing|
|Certain Tax Proceedings (including audits, deficiency notices & payment demands)||Divorce Proceedings|
|Eviction (if a judgment against you was issued prior to filing or your landlord claims you have endangered the property / used a controlled substance within the premises)||Criminal Proceedings & Investigations|
|Actions to Establish or Continue Child Support, Custody or Visitation||Actions to Establish or Continue Alimony/Spousal Support|
|Actions to Establish Paternity|
In addition to the actions mentioned above, the Automatic Stay does not cover the following:
- Actions to Enforce the Higher Education Act
- Actions to Exclude a Debtor from Medicare (or other federal health program)
- Perfection of Certain Liens (e.g., a mechanic's lien; perfection is the process of establishing a creditor’s right to claim property that is part of the bankruptcy estate)
- Presentment of a Negotiable Instrument
- Setoff of Income Tax Refund & Securities-Related Transactions
- Creation or Perfection of Ad Valorem Property Tax
- Collection Attempts on Loans Against a Pension Plan (including IRAs and other job-related pensions)
- Foreclosure Actions by the U.S. Department of Housing and Urban Development
More on How the Automatic Stay Works
The automatic stay typically protects only the person who filed for bankruptcy, and not any co-debtors, but this ultimately depends on what chapter has been filed. An automatic stay does not cover individuals who are mutually liable for debt in most Chapter 7 and 11 bankruptcy cases, but co-debtor stays do exist in Chapter 12 and 13 cases as well as certain unusual Chapter 11 cases.
When Does the Automatic Stay Go into Effect?
The court clerk will send a written notice of your bankruptcy filing to all of the creditors listed on your creditor matrix, or mailing list, within 24 to 48 hours of you filing your petition. Bear in mind, however, that creditors may not receive the notice for up to a week, as mail delivery times vary.
Once the stay is in effect, your creditors will be prohibited from initiating or continuing many actions against you.
If any creditor contacts you after you have filed your petition, you are allowed to inform that creditor of your bankruptcy filing and that they will receive notice of this in the mail. If you mistakenly left out the creditor on your matrix, you should update the court clerk’s office to ensure that any excluded creditor receives notice of your bankruptcy.
If the creditor in fact received the notice and contacts you anyway, you should contact your attorney immediately for advice. However, a creditor may seek relief from the automatic stay (i.e. have it removed) to continue collecting on your debt through court-allowed actions.
How Long Does the Automatic Stay Last?
Generally, the halting of collection-related actions will last for the duration of your bankruptcy case. There are, however, certain circumstances that can further limit the duration of the automatic stay, including:
If a creditor seeks relief (see next section) from the automatic stay and the court fails to act within 30 days, the automatic stay against that particular creditor’s actions will terminate automatically. Should this occur, you should consult your attorney regarding possible remedies, which vary by case.
In addition, if you have previously filed for bankruptcy within the calendar year, one of the following scenarios will apply:
- Two Filings in One Year: If your initial filing was dismissed, the court will assume you filed that petition in bad faith (i.e. you abused the bankruptcy system by misrepresenting information on your petition, for instance).In this case, the automatic stay will last only 30 days unless you, your case trustee, the U.S. trustee, or your creditor request that the stay remain in effect, and you can prove good faith (e.g., you followed all bankruptcy rules and did not commit fraud) in your most recent filing.
- Individual & Joint Filings in One Year: If your initial case as an individual debtor was dismissed and you later file a joint petition with your spouse, the automatic stay restriction (30 days) will apply only to you, not to your spouse.
- Three Filings in One Year: The court will assume you filed your previous petitions in bad faith. In this case, an automatic stay will not go into effect.
What Happens When Creditors Violate the Automatic Stay?
Violation of the injunction is the equivalent of disobeying a court order and is therefore punishable by law. Any violator can face orders for contempt, damages, sanctions or a combination of all three.
Examples of Automatic Stay Violations:
- If a creditor repossesses your vehicle or forecloses on your home while the automatic stay is in effect, that action will be declared invalid. The creditor will also face major ramifications.
- A creditor who takes action against property that the case trustee abandoned (i.e. did not liquidate to pay off your creditors) may not do so legally. When a trustee abandons your property because it has no value, it transfers back to you with the automatic stay intact.
- Even a minor error such as mistakenly continuing to send collection letters to a debtor can result in serious economic consequences for a creditor who has requested to lift the injunction. In this case, the court may impose penalties such as orders to pay fines, damages and legal fees.
Can Creditors Have the Automatic Stay Removed?
Creditors can seek relief from the automatic stay in order to continue a lawsuit, proceed against your personal property or preserve the value of an asset in which they have an interest. They usually do this soon after receiving notice of your bankruptcy filing.
The creditor’s first step will be filing a motion for relief with the court, which will then conduct a hearing within 30 days in order to determine whether to lift the stay.
Creditors are not allowed to take action against you until such a decision is reached. If a creditor violate this rule, they could face serious consequences (see next section).
Grounds for Lifting the Automatic Stay
- For Cause: This is the most common reason for automatic stays to be lifted. “Cause” may constitute bad faith or a lack of adequate protection of the property being used as collateral.
- Debtor Has No Equity: An automatic stay may be lifted if the value of collateral property does not exceed amounts owed on it.
- Stay Is Not Necessary for Reorganization: In a Chapter 11, 12 or 13 case, a lender must prove that property isn’t needed for the successful reorganization of debts or that you are not likely to successfully reorganize within a reasonable timeframe.
Tips for Maximizing Automatic Stay Benefits
The automatic stay can protect you from a number of unpleasant situations, but it can also backfire if you fail to take certain actions. Maximize the effectiveness of the automatic stay by doing the following:
- Maintain Insurance Coverage: You must keep paying the premiums on your auto and/or homeowner’s insurance while your bankruptcy case is active. Failure to do so allows the court to lift the automatic stay and gives your creditor legal grounds to repossess your car or foreclose on your home.
- File at the Right Time: Timing is an important consideration when filing for bankruptcy, as it can either boost or diminish the power of the automatic stay. If a creditor files a lawsuit against you, for instance, you can file your petition at any time prior to your hearing to stop the proceeding, even at the last minute, if necessary. If you file after the hearing has taken place, you lose some of the stay’s protections.
- Protect Your Rights: If a creditor does not seek relief from the automatic stay and then violates it by taking action against your property, you must act quickly in order to assert your rights. Consult your lawyer, who may need to file a motion or complaint in court.
Ask the Experts: Inside the Automatic Stay
- What is the biggest mistake bankruptcy filers make in regard to the annual fee?
- What tips do you have for maximizing the benefit of the automatic stay?
- What, if any, regulatory changes related to the automatic stay process can we expect in the next few years?
The mistake is that some people get attracted by no-annual fee cards that have high interest rates. Taking such a deal only makes sense for people who know that they can pay off their balance in full every month. For those who do not, the interest rate is a more important feature than the annual fee.
What tips do you have for maximizing the benefit of the automatic stay?
Those who file for bankruptcy should be aware of the breadth of the stay, what it covers and what it does not. Also, it makes little sense for a debtor to make a payment right before filing if the underlying debt would be subject to the stay.
Exceptions to the stay exist for special creditors, like those seeking to collect child support.
The automatic stay of section 362 is pretty self-executing. Debtors should be attentive to creditors actions that might be in violation of the stay, and make sure they alert their lawyers to actions that creditor take that might be in violation of the stay such as continuing to send dunning collection letters, making phone calls, repossessing collateral, or failing to return collateral that’s been repossessed and not yet sold.
What, if any, regulatory changes related to the automatic stay process can we expect in the next few years?
The stay is statutory, not regulatory. I’m not aware of any contemplated changes to the stay that have been proposed by Congress.
Image: lantapix / Shutterstock
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