An automatic stay in bankruptcy is the injunction that prevents creditors from taking certain actions to collect debts. That is the technical explanation of an automatic stay. Let’s look at the simple explanation.
The automatic stay stops the people and companies that you owe from trying to get their money. In most cases, the automatic stay is in effect immediately when you file your Chapter 7 bankruptcy petition. That means you can expect the constant telephone calls, hateful letters, and fear of lawsuits to end as soon as you file your bankruptcy forms.
However, the automatic stay does not apply in a few situations. Let’s look at some things that the automatic stay can prevent and a few cases in which the automatic stay does not apply.
In this article:
What is an Automatic Stay?
What Can the Automatic Stay Stop?
What Can’t the Automatic Stay Stop?
When Does the Stay End?
Are there Exceptions to the Automatic Stay?
What Happens if a Creditor Violates the Automatic Stay?
What Can the Automatic Stay Stop?
When you file your Chapter 7 bankruptcy case, the automatic stay stops most collection lawsuits and other actions to collect debts. This gives you time to decide how to deal with some debts that may not be discharged in your Chapter 7 case. It also stops creditors from harassing you for payment so that you can begin to recover after a financial crisis.
Some of the actions that the automatic stay can stop temporarily or permanently include:
Most civil lawsuits to collect debts. If the civil lawsuit is filed to collect a debt that is eligible for a bankruptcy discharge (the debt is wiped away), the lawsuit is stopped. If you complete your bankruptcy case and the debt is discharged, the lawsuit cannot start again.
Disconnection of utility services. Filing bankruptcy for the sole purpose of preventing utility service from being disconnected is usually not usually a wise idea. However, this factor could be important for someone who needs to file bankruptcy and is facing their utilities being turned off. The automatic stay gives you at least a couple of weeks to pay the utility bill, so the power is not cut off.
Stop foreclosures. A Chapter 7 case stops foreclosure proceedings (a lawsuit to take your home if you do not pay your mortgage payments). However, the stay may be temporary if you cannot catch up your mortgage payments. The stay could give you a few additional months to get out of the home if you cannot afford to keep up with the mortgage payments. Once your bankruptcy is complete, the mortgage debt should be wiped out, and the company cannot try to collect any money from you that it does not make by selling your home.
Stop evictions. The automatic stay can also temporarily stop an eviction. However, as with a foreclosure, if you are behind in your rent payments, the stay is only temporary. Filing a Chapter 7 case can give you a few extra weeks to find somewhere else to live if you are facing an eviction. Beware that some courts may side with the landlord if the landlord already has an eviction order or if something illegal or harmful to the property is taking place. When your bankruptcy case is complete, any past due rent payments owed before you filed the bankruptcy case should be wiped out.
Stop wage garnishments. Filing a Chapter 7 case stops wage garnishments for any debts that are dischargeable in the bankruptcy case immediately. Therefore, if a credit card company has a wage garnishment order, your company should stop withholding money from your pay because the debt should be discharged once you finish your Chapter 7 case.
Stop repossessions. The automatic stay temporarily stops repossessions too. Because the creditor has a lien on the car title, the bankruptcy only temporarily stops the repossession. The creditor can take the car after the Chapter 7 case is closed or ask the court to take the car before the case is closed if you do not work something out with the lender. As with an eviction or a foreclosure, the automatic stay can give you a few weeks to arrange for another vehicle if you cannot afford the car payments.
What Can’t the Automatic Stay Stop?
Yes, there are some debts and actions that the automatic stay does not cover. Examples of things that the automatic stay will not cover include:
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
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 result 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 instances in which the automatic stay may not apply in your case depending on your unique situation. However, the automatic stay applies to most creditor actions in most Chapter 7 cases.↑ Back to top
When Does the Automatic Stay End?
The automatic stay should remain in effect until your Chapter 7 case is closed. Inc certain situation, there are a few exceptions to this rule.↑ Back to top
What Are Some Exceptions to the Stay?
Statement of Intent
Also, if you fail to file a Statement of Intention within 30 days of filing your Chapter 7 petition, the automatic stay terminates.
The Statement of Intention is a bankruptcy form that tells secured creditors what you intend to do regarding their debt. Secured creditors have a lien on property that secures the money you owe the creditor. If you do not pay the payments, the creditor gets to take the property. Examples of secured debts are mortgages and car loans.
When you file your Statement of Intention, you have 30 days to take whatever action you choose for each creditor. You can surrender your property to satisfy the debt. In other words, the creditor gets the property, and you do not owe the debt.
You can choose to sign a reaffirmation agreement to keep the property. A reaffirmation agreement says that you agree to pay the debt, usually under the same terms as the original loan, to keep the property.
Signing a reaffirmation agreement means that you owe the debt even after the bankruptcy case is closed. If you do not pay the debt, the creditor can take the property and sue you for any money owed after the property is sold.
You may also redeem the property. However, redemption requires you to pay one lump sum payment to the creditor for the value of the property. For instance, if your vehicle is worth $5,000, but you owe $10,000, you would only pay $5,000 to redeem the vehicle. Most people do not have the funds to redeem a vehicle, so they let it go to get rid of the debt.
Creditor Asks to “Modify The Stay”
There are cases in which a creditor may receive relief through an order modifying the automatic stay. This means that they want the court to make an exception and not have the stay apply to their debt. This allows creditors to resume collection actions. In most cases, the creditor must prove that you committed fraud, or it has a valid lien on property, and you are not making the payments.
The most common reason a creditor files a motion to modify the automatic stay (life the restrictions against collection actions) is when you are not paying your mortgage payments, rent payments, or car payments. Some creditors may wait until the Chapter 7 case is closed (four to six months from the filing date), but you cannot be certain what a creditor may do after you file a Chapter 7 case.
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 do not file a response with the court, the judge will usually give the creditor permission to take the property or continue a legal action. As discussed above, the automatic stay only temporarily stops some actions, but it may give you a few weeks or months to find a new place to live or another vehicle.↑ Back to top
What Happens If a Creditor Violates the Automatic Stay?
A creditor who violates the automatic stay faces penalties from the court. However, you must file the legal paperwork to sue the creditor for violations.
In most cases, creditors do not violate the automatic stay because they understand bankruptcy laws. It is important to remember that the creditor must receive notice of the bankruptcy filing to stop collection efforts.
The bankruptcy court mails notice of the bankruptcy filing to the addresses you put on your bankruptcy forms. However, it could take a few weeks for a large company to process the notice of Chapter 7.
Therefore, it is a good idea to keep your copy of the notice of bankruptcy in a convenient place. If a creditor calls, tell the creditor you filed Chapter 7 and give it the case number and filing date. That should stop further calls from the creditor.
What Happens After My Chapter 7 Case Is Closed?
Chapter 7 case is closed when the courts issues a bankruptcy “discharge.” is issued when the The bankruptcy discharge wipes out — or erases — debts 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 cannot 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. Many people who file Chapter 7 get rid of most, if not all, their unsecured debts. There are even instances where bankruptcy can erase debts that you accidentally forgot to include.↑ Back to top
Need Help Filing for Chapter 7?
Upsolve is a non-profit company that helps low-income individuals and couples who cannot afford a bankruptcy lawyer to file Chapter 7 on their own. Click here to use Upsolve’s free bankruptcy screening tool to help you qualify.↑ Back to top