When a debtor files a petition for bankruptcy, an automatic stay of all collection activities against the debtor takes immediate effect. This is a broad, temporary protection for the debtor against legal action to collect the debtor’s money or property to satisfy debts.
Application of stay
The automatic stay is not a specific court order. Rather, it springs into existence by operation of law upon the filing of the bankruptcy petition and freezes almost all collection efforts. The U.S. Bankruptcy Court provides notice of the filing to all creditors listed in the debtor’s bankruptcy petition.
Collection activity must stop against most, but not all, types of debts. Creditors, lenders and debt collectors must stop actions (in most situations) such as:
- Filing or continuing lawsuits
- Calling, mailing or demanding payment in person
- Garnishing wages
- Foreclosing on homes and other real estate, in most situations, depending on the point the foreclosure process has reached
- Collecting judgments
- Enforcing or creating liens
- Evicting tenants
- Disconnecting utilities
- And others
All debts will then be addressed through the bankruptcy process.
Chapter 13 features
While a foreclosure action on a debtor residence is stopped by the stay, only Chapter 13 provides a way to protect the home from eventual foreclosure. The debtor can make up past due mortgage payments over a reasonable time, but must also keep current on payments as they continue to come due.
Chapter 13 reorganization bankruptcy also has a special provision that normally extends the protections of the automatic stay to codebtors in consumer debts.
Limits of stay
Collection efforts against certain kinds of debts (like some taxes or alimony) are not automatically stayed, but the provisions of the law that create the exceptions are very complex.
Legal counsel important
Application of the stay is complicated. A debtor in bankruptcy should seek representation by an experienced attorney who can thoroughly analyze how the stay is likely to affect the particular debts of the client.
On the other side, any creditor, lender or debt collector whose collection efforts are interrupted by an automatic stay should seek knowledgeable legal advice about how to approach future collection actions. For example, depending on the type of debt, it may be possible to get court permission to proceed with certain collection efforts despite the stay. However, this must be done very carefully because violation of an automatic stay can open the creditor to liability.
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