What Is an Automatic Stay In Bankruptcy?
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An automatic stay is a powerful protection that kicks in as soon as you file for bankruptcy. It stops most creditors from trying to collect debts. This means they can't call you, send letters, garnish your wages, or start or continue lawsuits against you. The protection lasts until your Chapter 7 bankruptcy case ends or the court lifts the stay.
Written by the Upsolve Team. Legally reviewed by Jonathan Petts
Updated October 23, 2024
What Is the Automatic Stay in Bankruptcy?
The automatic stay is a powerful protection that goes into effect as soon as you file your bankruptcy petition. It’s one reason bankruptcy is such an effective debt relief option.
The automatic stay stops most creditors from trying to collect debts from you. This includes collection activities like wage garnishment, repossession, foreclosure proceedings, and harassing phone calls from debt collectors. The automatic stay gives you breathing room to figure out your next steps without the pressure of creditors coming after you.
Here’s how it works: Once you file Chapter 7 or Chapter 13 bankruptcy, the court notifies your creditors about the bankruptcy filing, and the automatic stay takes effect. The automatic stay acts as a legal shield that stops creditors from taking further collection action.
While this is a huge relief for many people, it’s important to note that it doesn’t stop everything. Some debts aren’t affected by the stay, like child support, alimony payments, and certain tax debts. In some cases, creditors can ask the bankruptcy court to lift the stay, but this usually only happens in special situations, like if you’re behind on a car loan and the lender wants to repossess the car.
The automatic stay is outlined in Section 362 of the Bankruptcy Code.
What Can the Automatic Stay Stop?
When you file your Chapter 7 bankruptcy case, the automatic stay stops most collection lawsuits and other collection efforts.
The automatic stay can temporarily or permanently stop:
Most debt lawsuits: If a debt collector sues you to collect a debt that’s eligible for a bankruptcy discharge, the automatic stay can stop the lawsuit. If you complete your bankruptcy proceeding and the debt is discharged, the lawsuit can’t start again.
Disconnection of utility services: When you file, the automatic stay will stop a utility disconnection and give you at least a couple of weeks to catch up on the bill so your power or water isn’t cut off right away.
Home foreclosures: Filing Chapter 7 can temporarily stop a foreclosure. If you can’t catch up on mortgage payments, the automatic stay gives you some extra time before the foreclosure continues.
Evictions: The automatic stay can temporarily delay eviction, giving you a few extra weeks to find new housing if you're behind on rent. But if the landlord already has an eviction order or there’s illegal activity, the court may allow the eviction to continue. When your bankruptcy case is complete, any past-due rent payments owed before you filed the bankruptcy case should be wiped out.
Wage garnishment: Filing a Chapter 7 case immediately stops wage garnishments for any dischargeable debts.
Repossessions: The automatic stay temporarily stops car repossessions. Since the lender has a lien on the car, they can still repossess it after the Chapter 7 case ends or ask the court to repossess it sooner. The stay gives you a little extra time to arrange for another vehicle if you can’t keep up with payments.
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What Can’t the Automatic Stay Stop?
The automatic stay doesn’t cover certain debts and actions, including:
Criminal proceedings
Actions in family court for alimony or child support
Tax audits and some other actions by government agencies
Loans against your retirement accounts or pension
Debts incurred after your case was filed
Two cases filed in one year. If you had a previous bankruptcy case in the same year, the automatic stay is only in effect for 30 days unless the debtor asks the court to extend the stay.
Three cases filed in a single year. This results in no automatic stay without a motion and a hearing. The court may or may not grant the request for an automatic stay.
There may be other situations where the automatic stay doesn't apply, depending on your specific circumstances. However, in most Chapter 7 cases, the automatic stay stops most creditor actions.
When Does the Automatic Stay End?
The automatic stay typically remains in effect until your Chapter 7 case is closed. But there are two important exceptions to this rule:
If you fail to file the Statement of Intention within 30 days of filing your Chapter 7 petition
If a creditor asks to modify the stay
What Is the Statement of Intent Exception?
If you fail to file a Statement of Intention within 30 days of filing your Chapter 7 petition, the automatic stay is terminated.
The Statement of Intention is a bankruptcy form that tells secured creditors what you intend to do regarding their debt. Examples of secured debts are mortgages and car loans.
Most people do one of three things:
Surrender the property to the creditor to get rid of the debt
Reaffirm the loan to keep the property
Redeem the property to keep the property
To learn more, read:
What Does It Mean if a Creditor Asks To Modify the Stay?
Some creditors may request a court order to modify the automatic stay. This means that they want the court to make an exception for them and not have the stay apply to their debt. They must get court approval to do so.
Creditors most often file a motion to modify the automatic stay when filers fall behind on their mortgage, rent, or car payments. If the court agrees to modify the stay, it’s lifted for that debt, and the creditor can restart collection actions.
If a creditor decides to ask the court to let it proceed with a foreclosure, eviction, or repossession, it must file a motion with the court. The motion must also be served (mailed) to you so that you have notice of the hearing.
If you file a response to the motion with the court, the judge will have a hearing. If you don’t file a response with the court, the judge will usually give the creditor permission to take the property or continue a legal action.
What Happens if a Creditor Is in Violation of the Automatic Stay?
If a creditor ignores the automatic stay and continues trying to collect a debt, they’re violating federal bankruptcy law. Violating the automatic stay could include a creditor calling you, sending collection letters, filing lawsuits, or trying to repossess property.
If this happens, notify the court or your bankruptcy lawyer if you hired one. The court can sanction the creditor for violating the stay. In some cases, the creditor may be required to pay punitive damages, such as reimbursing you for any financial harm they caused or covering your attorney fees. Some courts may also award additional damages if the violation was particularly harmful or intentional.
The automatic stay is a legal protection, and creditors are expected to follow it. If they don’t, the law gives you tools to hold them accountable.
To learn more, read our comprehensive guide on What To Do If A Creditor Violates The Automatic Stay.
What Happens After My Chapter 7 Case Is Closed?
A Chapter 7 case is closed when the court issues a bankruptcy discharge. The bankruptcy discharge erases all the eligible debts that you listed on your paperwork.
A creditor cannot collect a discharged debt. For example, if you owe a credit card company $5,000, it can’t try to collect the debt if it was discharged in your bankruptcy case.
Most unsecured debts, including credit cards, medical bills, personal loans, and most judgment loans, are dischargeable in a Chapter 7 bankruptcy case.
Let’s Summarize…
Once you file bankruptcy, the automatic stay goes into place and provides instant relief from creditors and debt collectors. The automatic stay applies to most debts and usually stays in place in Chapter 7 cases until you get your bankruptcy discharge.
If you’re thinking of filing Chapter 7 bankruptcy and you want some help, see if you’re eligible to use Upsolve’s free filing tool. Upsolve has helped thousands of people get rid of over $700 million in debt. Our services are 100% free and our users love us.
If you have a complicated bankruptcy case or you want some personalized legal advice from a bankruptcy attorney, Upsolve can also help connect you for a free consultation.
