Bankruptcy is a legal process that helps people who are struggling with debt. The most common reason people file for bankruptcy is because they have debts they cannot afford to pay. This can happen when someone experiences a life event or hardship that causes a financial crisis, such as a job loss or medical emergency. Filing for bankruptcy can provide a fresh start and stop debt collectors from calling or seizing property. The bankruptcy court can help individuals recover and rebuild by providing a process called the automatic stay. This process prevents creditors from taking any action against the debtor, giving them time to work out a plan to pay off their debts.
Bankruptcy Laws Give Debtors a Fresh Start Without the Burden of Debt
Did you know that one of the primary reasons for the bankruptcy code is to give debtors a "fresh start" from debts they cannot afford to pay? In the 1934 case Local Loan vs. Hunt, the United States Supreme Court held that bankruptcy helps "honest but unfortunate" debtors by giving them a new opportunity in life and a clear field for future effort. This process helps without the pressure and discouragement of preexisting debt.
The bankruptcy discharge is the tool used to give debtors the "fresh start" offered through the bankruptcy process. Once the bankruptcy court discharges a debt, creditors cannot take any legal action to collect the debt. This means that creditors cannot garnish your wages or sue you in court to collect a discharged debt. The law also prohibits debt collectors from harassing or threatening you to get you to pay a discharged debt. If a creditor or debt collector breaks the law, the court can punish them. In some cases, a person might receive compensation for damages if the illegal collection of a discharged debt caused them harm.
But what happens before the court grants the bankruptcy discharge? Creditors may try to seize your assets and income, but the automatic stay provision stops them. The automatic stay is a court order that stops creditors from collecting debts from you as soon as you file for bankruptcy. This provision gives you time to work out a payment plan or a debt discharge plan with the court.
The Bankruptcy Automatic Stay Protects You From Creditors
When you file for bankruptcy, the court doesn't issue your bankruptcy discharge until your case is ready to close. To protect debtors from creditors while the bankruptcy court is pending, Congress included the automatic stay in the Bankruptcy Code. This stay prevents creditors from taking specific actions once a person files a bankruptcy petition.
The automatic stay remains in effect until a court order modifies it or the case closes. Section 362 of the Bankruptcy Code explains what types of actions are stayed by filing the Chapter 7 or Chapter 13 bankruptcy petition. These include:
- Debt collection lawsuits or any court action to collect a debt
- Seizing assets that are part of the bankruptcy estate, including repossessions, foreclosures, levies, wage garnishments, and more
- Contacting you to demand payment of debts, although the creditor or debt collection may send a statement of the amount on the account as long as the statement does not demand payment of the debt
- Debt collectors and creditors should stop calling you once you tell them you filed a bankruptcy case and give them your case number
When you file for bankruptcy, the bankruptcy court sends notices to all creditors on your bankruptcy forms. However, it could take some time for the creditors to receive and process the notice. Therefore, it's important to keep your bankruptcy number near your phone.
If a creditor calls, tell them you filed for bankruptcy and give them the case number and filing date. If you have a lawyer, give them your lawyer’s name and telephone number. You are not required to discuss your case or answer any questions for the creditor. It is best to refer them to your bankruptcy attorney.
Some Debts May Not Be Subject to the Bankruptcy Automatic Stay
If you owe alimony or child support, the automatic stay will not prevent the family court from continuing proceedings for non-payment. However, there is a way to include past-due support payments in your Chapter 13 plan if you file under that chapter. By doing so, you can stop further actions to collect the back support payments if you immediately resume timely support payments.
It's important to note that the automatic stay may not stop some government actions, such as an Internal Revenue Service Audit. However, it can stop the IRS from issuing a tax lien or freezing property without bankruptcy court approval.
Lastly, the automatic stay does not stop criminal proceedings. For instance, if a criminal court sentenced you to pay a fine or serve community service for writing bad checks, the automatic stay will not stop the criminal court from carrying out the punishment.
The Court May Terminate the Bankruptcy Automatic Stay in Some Cases
When you file for Chapter 7 or Chapter 13 bankruptcy, an automatic stay is put in place to prevent creditors from taking any collection action against you. However, there are some situations where the automatic stay may not take effect immediately.
For example, if you had a bankruptcy case within the past year, the automatic stay will only last for 30 days unless you petition the court to extend it. To do this, you must show that you filed your current case in good faith. The burden of proof is on you to convince the court to grant an extension.
If a creditor wants to continue with a foreclosure or repossession action, they can file a motion to modify the automatic stay. The court will usually grant this motion if the debtor cannot provide adequate protection for the creditor's interest in the collateral through a Chapter 13 bankruptcy plan.
In a Chapter 7 case, the debtor must pay the loan in full to stop a foreclosure or repossession. However, filing for Chapter 7 can delay the process for at least a month while the creditor prepares and files the motion.
It's important to understand the limitations of the automatic stay and how it can affect your bankruptcy case. Consulting with a bankruptcy attorney can help you navigate these complex issues.
The Automatic Stay Only Delays Some Actions
Are you worried about being evicted from your home? Filing for bankruptcy might offer some temporary relief through an automatic stay. But, it's important to understand that this only applies in certain situations and for a limited time. If the creditor already obtained an eviction order before you filed for bankruptcy, they may still proceed with the eviction.
However, there is a possibility that the landlord can file a motion to modify with the court, asking for the automatic stay to be lifted. If you filed for Chapter 7 and can't afford to pay past due rent, the court will likely lift the stay and allow the eviction. In contrast, if you filed for Chapter 13 and the lease term doesn't exceed the term of the Chapter 13 plan, you might be able to include the past due rent payments in the plan.
What Happens If a Creditor Violates the Automatic Stay?
If a creditor violates the automatic stay, they could face consequences from the court. This may include sanctions such as fines, attorneys’ fees, and damages for actual losses. The court has the power to hold the creditor accountable for their actions.
If you are unsure of what steps to take in holding a creditor accountable for violating the automatic stay, a bankruptcy lawyer can provide guidance. If you filed for bankruptcy without the assistance of an attorney, you can request help by sending a letter to the judge or court clerk.