Many people have heard the term "Automatic Stay," but may not know what it really is.
The Automatic Stay is one of the most fundamental principals in a Chapter 7 and Chapter 13 bankruptcy, and it is the reason we use the term "filed for bankruptcy protection" to describe someone who has filed for bankruptcy.
It is the power of the bankruptcy laws, pursuant to Section 362 of the Bankruptcy Code, to protect the Debtor (person who files for bankruptcy) by completely stopping virtually all collection activities of the Debtor's creditors against the Debtor, the Debtor's property, and the property of the bankruptcy estate once a bankruptcy is filed. Secured creditors (your mortgage lender and/or car lender) may, however, petition the court for "relief" from the Automatic Stay. A common example of this occurrence is the situation where property (like your house and/or car) is being "surrendered" through the bankruptcy.
The Automatic Stay goes in to place the minute a Chapter 7 or Chapter 13 is filed with the court, and in most cases, the Automatic Stay remains in place for the duration of the bankruptcy. A few common examples of the protections afforded by the Automatic Stay include protection from:
- Creditor harassment via telephone;
- Lawsuits that have been filed against the Debtor or are about to be filed against the Debtor;
- Garnishments (ones already existing and ones being considered by your creditors);
- Frozen bank accounts;
- Foreclosures, and sale dates;
- Repossessions;
- Withholding of academic transcripts from colleges for unpaid tuition bills (see our prior post entitled "The Dischargeability of Unpaid Tuition bills");
A few examples of the types of actions that the Automatic Stay does not stop include:
- A criminal proceeding against the Debtor;
- An action against the Debtor for a family support order (or modification of an existing order);
- Tax audit or a demand for tax returns, or assessment of returns;
And, while the Automatic Stay is an undoubtedly good thing for Debtors, it can, unfortunately, cause some confusions of which Debtors must be aware. Courts have determined that the Automatic Stay also prevents your mortgage company and/or car lender from sending to you your regular monthly bill (as this is technically a "collection activity") even if you will be retaining the house and/or the car through the bankruptcy. Additionally, many lenders will discontinue automatic bill pays or internet payments.
However, in spite of all this, there is no law that prevents your lender from accepting payments made voluntarily (though they will likely have a special address to which they want payment sent). Therefore, we always recommend to our clients in a Chapter 7 bankruptcy or a Chapter 13 bankruptcy that you contact your lender's bankruptcy department to find out where payment should be sent.
Additionally, once a Chapter 7 bankruptcy or Chapter 13 bankruptcy is completed and the Order of Discharge is granted, the Automatic Stay becomes permanent as to the debts discharged. This provides permanent and on-going protection against collection activities by creditors in relation to the pre-petition debts that have been discharged.