It has been said that the automatic stay protects you against any action that might make a bill collector smile, and that is the truth.
The minute you file your bankruptcy case, an automatic stay goes into effect and under threat of penalty all creditors must immediately discontinue all collection efforts. Except for very limited situations, the stay puts an immediate stop to all phone calls, threatening letters, foreclosures and garnishments. The stay applies even when creditors are not aware of its existence – for example a Chapter 13 debtor who files at 9:52 AM on foreclosure day will stand protected against a foreclosure sale that takes place at the county courthouse at 9:55 AM. The repo man who picks up your car after you file bankruptcy must return it.
The purpose of the automatic stay is to give you, the borrower, some breathing room and some time – usually a few weeks – to figure out what you are going to do about your debt situation. While creditor actions are halted for the time being, the automatic stay of bankruptcy is not designed to offer permanent relief in every situation. The Bankruptcy Code extends to creditors certain rights to ask the Judge for relief from the stay. You and your lawyer should formulate a clear strategy for what you hope to accomplish with your bankruptcy either at the time you file your case or immediately thereafter. A successful bankruptcy outcome will result in long term relief, such as a discharge of your debts or the confirmation of a repayment plan.
Exceptions to the Automatic Stay
In recent years, Congress has chipped away at the blanket protection offered by the automatic stay. By law, the stay no longer applies to certain legal proceedings, such as:
- the commencement or continuation of a criminal prosecution
- a proceeding to establish or modify child support, or establish paternity
- a divorce proceeding (however property division matters may be stayed)
- the collection of a “domestic support obligation”
- actions by the state to suspend your driver’s license or withhold your tax refund under certain circumstances
- certain actions by landlords to recover rental property
Further, in 2005 Congress changed the rules that apply when a bankruptcy debtor files a 2nd or 3rd case when you were a debtor in a previous case that was active during the past year, but had been dismissed. The purpose of this new rule (Bankruptcy Code Section 362(c)(3) is to stop people from filing multiple Chapter 13 cases to stop foreclosures.
- If you file a Chapter 13 within one year of a prior case that was dismissed, the automatic stay goes into effect, but only for 30 days. During that 30 days, you must file a motion in bankruptcy court and convince the judge to extend the stay, otherwise it automatically comes to an end on the 31st day after filing.
- If you file a second Chapter 13 case within one year of a prior case that was dismissed, no automatic stay goes into effect – you will have to file a motion in bankruptcy court to ask the judge to impose a stay.
Creditors Penalized for Violation of the Automatic Stay
If a creditor ignores the automatic stay and continues to harass or, worse, continues to pursue legal action, you may have a claim for damages against that creditor. Bankruptcy Judges consider the automatic stay the core protection of the bankruptcy process and our firm has obtained damage awards against creditors who intentionally violate the stay.