What Is the Automatic Stay in Bankruptcy and How Does It Protect You?

An automatic stay is a legal mechanism of bankruptcy law that generally prohibits creditors or other entities from taking collection actions against a debtor who has filed for bankruptcy. The automatic stay can give you immediate breathing room when you’re facing collection calls, wage garnishment, foreclosure, eviction, repossession, or a lawsuit. In most cases, the protection begins as soon as you file for bankruptcy, but exceptions, termination rules, and requests for relief from the stay can complicate matters.

A bankruptcy attorney can help you understand exactly what the stay protects in your situation and what steps to take if a creditor keeps pursuing you. If you’re considering bankruptcy or dealing with creditor action, use the Super Lawyers directory to find a qualified bankruptcy attorney.

What Is the Automatic Stay?

An automatic stay prevents creditors from collecting against a debtor who has filed for bankruptcy. The stay gives the debtor immediate relief from collection efforts while the case moves through the court system.

The protection applies broadly to creditors, including secured and unsecured creditors, although statutory exceptions and other limitations apply. An automatic stay applies to all three types of bankruptcy: Chapter 7, 11, and 13.

When Does the Automatic Stay Take Effect?

An automatic stay generally takes effect when the debtor’s petition is filed in bankruptcy court. The filing date is crucial. That date determines whether a creditor’s actions occurred before or after the stay took effect.

Repeat bankruptcy filings can affect how long the stay remains in effect, making the timing rules more complicated in some cases.

What Does the Automatic Stay Stop?

The automatic stay can put a temporary stop to many of the collection actions that may have been causing financial pressure before you filed for bankruptcy.

Generally, creditors must stop efforts to collect debts that arose before the bankruptcy case began. That protection can reach several types of collection activity, although exceptions and other limitations apply.

Stop Collection Efforts

Creditors generally must stop trying to collect prepetition debts once the automatic stay takes effect. That can include collection calls, letters demanding payment, and other attempts to get you to pay a debt that existed before you filed for bankruptcy.

Stop Wage Garnishments

A creditor that is garnishing your wages to collect a prepetition debt generally must stop the garnishment when the automatic stay takes effect. This can provide immediate relief if a portion of each paycheck has been going toward an unpaid credit card, medical bill, personal loan, or other debt.

There are important exceptions, however. Certain garnishments and collection efforts related to domestic support obligations may continue despite the bankruptcy filing. The type of debt and the reason for the garnishment matter.

Stop Foreclosures

The automatic stay generally stops a creditor from moving forward with foreclosure proceedings against property protected by the bankruptcy stay. If you are facing foreclosure, this can give you time to address the mortgage debt within the bankruptcy process rather than immediately losing the property.

The stay does not erase the mortgage or permanently prevent foreclosure. A secured creditor can ask the bankruptcy court for relief from the stay and, if the court grants the request, may resume foreclosure proceedings. What happens next can depend on the type of bankruptcy, the value of the property, the amount owed, and other circumstances.

Stop Repossessions

The automatic stay can also stop a creditor from repossessing property that secures a prepetition debt, such as a vehicle. If a lender has not yet repossessed the vehicle when you file for bankruptcy, the stay may prevent the lender from taking it while the stay remains in effect.

Timing can become especially important when a repossession occurred before the bankruptcy filing. Filing for bankruptcy does not automatically mean you will get the property back, either. Secured creditors may have rights to the property and may seek relief from the stay in bankruptcy court.

Stop Lawsuits and Judgments

The automatic stay generally prevents creditors from starting or continuing lawsuits to collect prepetition debts. It can also stop certain efforts to enforce an existing judgment. This includes efforts to take possession of property or enforce a lien.

That does not mean every lawsuit involving someone who files for bankruptcy must stop. The automatic stay has exceptions, and the nature of the lawsuit matters. A proceeding involving a prepetition debt may be treated differently from a case involving a different type of claim or an action that falls within one of the statutory exceptions.

What Are the Exceptions to the Automatic Stay?

The automatic stay is broad, but it does not apply to every legal proceeding or collection activity. Some actions can continue even after a person files for bankruptcy. Whether an exception applies can depend on the type of proceeding, the parties involved, and what the creditor or government agency is trying to accomplish.

Criminal Proceedings

Filing for bankruptcy does not stop criminal proceedings. It also generally doesn’t prevent the government from starting or continuing a criminal action against the debtor.

Bankruptcy proceedings and criminal charges operate in separate judicial systems. Generally, having a case in one system won’t stop or affect the other.

Domestic Support Obligations

The automatic stay provides limited protection from actions involving domestic support obligations. Child support, alimony, maintenance, and other qualifying support obligations can continue.

For example, the stay does not generally prevent actions to establish or modify a domestic support obligation. It also does not stop certain efforts to collect support from property that is not part of the bankruptcy estate.

In other words, filing bankruptcy does not allow you to put child support or other qualifying domestic support obligations on hold simply because other creditors must stop collecting.

Government Police and Regulatory Actions

Certain government actions also fall outside the automatic stay. The Bankruptcy Code generally allows governmental units to enforce their police or regulatory powers, including actions intended to protect public health, safety, or welfare.

There is an important distinction here. The exception is intended for legitimate government enforcement, not simply to give a government agency another way to collect a debt. Whether the exception applies can depend on the purpose and substance of the government’s action.

Other Statutory Exceptions

Section 362(b) contains many other exceptions that may allow particular proceedings or actions to continue. These include certain tax proceedings, actions involving the perfection of certain property interests, and other specialized matters.

You do not need to memorize every exception to understand the basic rule: filing bankruptcy does not automatically stop every legal action involving you or your property. If you are unsure whether the automatic stay applies to a particular proceeding, a bankruptcy attorney can review the circumstances and explain what protections are available.

Can a Creditor Ask the Court to Lift the Stay?

A creditor may have the right to ask the court to lift the stay in certain situations. Common reasons a secured creditor may request relief include inadequate protection or the debtor’s lack of equity in the property, combined with circumstances indicating the property is not necessary to an effective reorganization.

The creditor generally files a motion seeking relief, and the bankruptcy court determines whether the statutory requirements are met. Relief can take various forms, including allowing a creditor to proceed with foreclosure, repossession, litigation, or another action otherwise stayed. The court may impose conditions or limit the scope of the relief depending on the circumstances.

What Happens If a Creditor Violates an Automatic Stay in Bankruptcy?

Creditors cannot continue prohibited collection activity simply because they were unaware of the bankruptcy filing or disagreed with it. Bankruptcy Code provides a remedy for an individual injured by a willful violation of the stay.

The debtor may be entitled to actual damages, including costs and attorneys’ fees, and punitive damages may be available in appropriate circumstances. The specific remedy depends on the facts and applicable bankruptcy law.

The court will evaluate the creditor’s actions. The court treats an honest mistake differently from willful disregard of the stay. The court will look at the creditor’s conduct before and after learning about the bankruptcy case.

How Long Does the Automatic Stay Last?

An automatic stay doesn’t last forever. It’s meant to be temporary. The stay will terminate when the bankruptcy case ends, or the debtor’s interest in the property ends.

Exceptions apply to cases involving an individual who had another bankruptcy case pending or dismissed within the preceding year. The stay can also end before the case is completed if the court grants the creditor relief.

What Should You Do If a Creditor Contacts You After You File Bankruptcy?

If you have filed for bankruptcy and a creditor continues to attempt collection, begin documenting actions. Keep a record of the collection calls, letters, garnishment activity, foreclosure notices, repossession attempts, and other communications.

Provide the creditor with the bankruptcy case information. Keep a record of this notice. Consider contacting an attorney who can help advocate for your rights.

Don’t assume that every action a creditor takes will automatically violate the stay. Sometimes, specific facts can influence whether the action is allowed.

Seek Legal Advice

The automatic stay can provide immediate protection against many collection actions that accompany overwhelming debt. A bankruptcy attorney can help you determine whether the stay applies to a particular action and what to do if a creditor violates it.

For help with a bankruptcy matter, use the Super Lawyers directory to find a qualified bankruptcy attorney who can evaluate your situation.