How Does the Automatic Stay Protect a Debtor During a Bankruptcy Case?

People who have experienced financial difficulties that have caused them to be unable to pay their debts may be concerned about the steps that creditors may take to collect what is owed. Creditors or collection agencies may contact a debtor and ask them to make payments, and some creditors may act in a harassing manner, including making threats or contacting a person’s employer. In some cases, a creditor may initiate a lawsuit attempting to collect what is owed, or they may repossess property or begin foreclosure proceedings on a debtor’s home. For debtors who are considering bankruptcy, it is important to understand the protections they can receive, including the automatic stay that will go into effect during the bankruptcy process.

What Is the Automatic Stay?

In legal terms, a “stay” is an order by a court that requires parties to temporarily stop certain actions. When a debtor files a bankruptcy petition, an automatic stay will be put in place while the case is ongoing. This stay will require creditors to cease all collection actions, including:

• Creditor harassment - Creditors will be prohibited from contacting a debtor and asking them to pay what is owed. They cannot call a person at home or at work, send them notices in the mail, or use any other methods to attempt to recover debts.

• Judgments and collections - If a creditor has initiated a lawsuit against a debtor, the automatic stay will require these proceedings to be placed on hold. If a creditor has already obtained a judgment, the debtor will not be required to pay the amount of this judgment. For example, if a court has allowed a creditor to garnish a debtor’s wages, this garnishment will be stopped by the automatic stay.

• Foreclosures or repossessions - A mortgage lender will not be able to move forward with foreclosure proceedings while the automatic stay is in effect. A creditor will not be able to take any other actions to repossess the property if a debtor has defaulted on a secured debt.

• Tax collections - The automatic stay will prevent the IRS from collecting tax debts, including actions such as wage garnishment or levies to seize the funds in a taxpayer’s bank account. However, the IRS will be able to conduct a tax audit or send requests for tax returns.

The automatic stay is meant to be a temporary pause that will allow a debtor to move forward with bankruptcy proceedings and receive debt relief. Family support obligations, such as child support or spousal support, will not be affected by the automatic stay, and a person will still need to make these payments or pay any amount that is past due. In some cases, creditors may file petitions asking for the automatic stay to be lifted, such as in situations where a lender wishes to move forward with a foreclosure. However, these requests will usually only be granted if a creditor suffers irreparable harm because it cannot collect debts or take other actions against a debtor.

Contact a U.S. Bankruptcy Attorney

If you are facing harassment from creditors or other financial issues related to the debts you owe, a qualified bankruptcy lawyer can help you determine your options and explain the benefits you may be able to receive by filing for bankruptcy. 

Sources:

https://www.law.cornell.edu/uscode/text/11/362

https://www.investopedia.com/terms/a/automaticstay.asp