One of the most significant benefits of filing for bankruptcy is a feature known as an "automatic stay." It prevents creditors from collecting (or even trying to collect) on debts owed by the person declaring bankruptcy while the case is ongoing.
If filing for bankruptcy is the financial strategy you have chosen for reorganizing your finances, you should learn how to make the most of the automatic stay feature.
Timeline and Exceptions
In most cases, the stay against creditor action goes into effect when someone files for bankruptcy, hence using the term “automatic” in an automatic stay. However, there are some reasons why a stay can be delayed or lifted:
- If there is no equity on the collateral property
- If the stay is not essential for reorganization
- If there is proof of bad faith or lack of adequate protective measure on the collateral
- If the court approves the creditor's motion for relief
- If there are other procedures that need to take place
- If the court determines that someone is a serial bankruptcy filer
If you have an outstanding balance on an asset, such as a house, but the home's value has dropped to below what you owe, there is no equity in the property. The creditor might be able to prove that you you haven't taken care of the home and that you caused the reduction in value.
If creditors can prove that you can reorganize your finances without a stay, the bankruptcy court can lift it. It can also lift an automatic stay to allow another legal action to take place, such as divorce proceedings.
Serial bankruptcy filers are debtors who repeatedly file for bankruptcy over a short period. Unfortunately, there is no preset definition of what a short period is. The decision is made on a case-by-case basis, usually by a bankruptcy judge or trustee.
Note
Make sure you maintain insurance coverage and file for bankruptcy at the right time to avoid losing total protection from the stay.
When a bankruptcy judge or trustee has deemed you a serial filer, it impacts your automatic stay timeline or cancels it altogether. Here are some common serial filer scenarios and how they affect automatic stays:
- Two cases in one year: If you have had one bankruptcy case pending during the previous year and then file a second one, the second case's stay will only last for 30 days, unless you successfully make your case for why the court should extend it.
- Three cases in one year: If you have had two bankruptcy cases pending during the previous year, the stay will not go into effect at all when you file the third case. To remedy that, you can file a motion, set a hearing, and try to convince the judge that filing three claims is reasonable for your specific situation. You'll need to demonstrate that you aren't trying to take advantage of your creditors or abuse the bankruptcy system.
- A joint filer who has filed individually: If you filed within the last year, and the case was dismissed, if you file jointly within the same year, the automatic stay applies to the person you filed with, but not you.
For instance, suppose you were recently discharged from a Chapter 7 bankruptcy but immediately filed for Chapter 13 to protect your house and car. While within Chapter 13, you realize that you cannot keep up with the re-payment plan, so you allow your case to be dismissed and refile again soon after. You would be considered a serial bankruptcy filer, because you had too many filings in a short time.
Automatic Stay Termination
The automatic stay's length also depends on whether it applies to collection activity against the debtor or against the debtor’s property.
If collection is against the debtor, the automatic stay generally lasts until the debtor receives or is denied a discharge, or the case is dismissed. At that point, creditors can re-commence collection activity on debts that are not discharged. For debts that are discharged, a permanent discharge injunction takes the place of the temporary automatic stay.
Even when you file for bankruptcy, a lender is entitled to receive payment or take possession of the collateral.When you file a Chapter 7 bankruptcy case, among the many documents you provide is a Statement of Intention that tells the court and your creditors whether you will surrender the property, redeem the collateral, or reaffirm the debt.
Note
If you file for bankruptcy on April 1 and continue charging on a credit card, the stay only covers debts incurred prior to the filing. You'd still be liable for the debts created after April 1.
Those who intend to keep the property need to either redeem or reaffirm within 30 days of filing the bankruptcy case. If you fail to file the statement on time, the stay automatically lifts the next day (31 days after the original bankruptcy filing). The creditor is then free to proceed with repossession or any other lawful collection activity against that collateral.
Creditor Stay Violations
If a creditor or collector continues collection efforts while you are under the protection of an automatic stay, it's a violation of bankruptcy law. Should a violation occur and be shown to injure a bankruptcy petitioner, the creditor or collector may have to pay compensatory damages, reimbursem*nt of attorney's fees, or punitive damages.
Creditors sometimes infringe upon a stay—typically, it is because they were not aware that a bankruptcy petition had been filed.
Remember to consult with legal experts such as bankruptcy attorneys. Filing for bankruptcy is a significant decision that impacts your finances, personal life, and future.
FAQs
How Long Does an Automatic Stay Last? The automatic stay remains in effect until your case is closed. But, of course, it isn't always that simple. For Chapter 7, it's often the case that a stay will last the 3-5 months the court case is open.
How long does the automatic stay remain in effect in chapter 11? ›
The automatic stay remains in effect as to property of the estate until the property is no longer property of the estate (i.e., revested in the debtor or abandoned) and the automatic stay as to individual debtors remains in effect as to the debtor until the granting or denial of the debtor's discharge, whichever ...
How do you respond to motion for relief from automatic stay? ›
Two main methods exist for fighting a motion for relief from automatic stay. These types are “procedural” and “substantive” objections. Basically, procedural objections challenge the manner in which the motion was filed, while substantive objections challenge the actual substance of the motion.
What is relief from automatic stay in Chapter 7? ›
However, under certain circ*mstances, creditors can ask the court to allow them to go ahead with collections in spite of the bankruptcy filing. This is called a Motion for Relief from Automatic Stay, and a successful one often negates the whole purpose of filing for Chapter 7 bankruptcy in the first place.
What happens after an automatic stay is lifted? ›
The automatic stay is an order that goes into place when you file for bankruptcy and stops most collection efforts. But the stay isn't absolute, and a creditor can ask the bankruptcy court to lift the automatic stay and allow collection efforts to resume. If successful, the creditor can continue pursuing its debt.
What is the automatic stay rule? ›
An automatic stay is a provision in United States bankruptcy law that temporarily prevents creditors, collection agencies, government entities, and others from pursuing debtors for money that they are owed.
How long is stay in Chapter 11? ›
The automatic stay that accompanies the filing of a Chapter 11 case normally gives the debtor a moratorium of several months on the payment of many of its debts.
How long does an automatic stay last? ›
How Long Does an Automatic Stay Last? The automatic stay remains in effect until your case is closed. But, of course, it isn't always that simple. For Chapter 7, it's often the case that a stay will last the 3-5 months the court case is open.
Can you waive the automatic stay? ›
Before bankruptcy, the debtor does not have the capacity or authority to waive fundamental rights conferred by the Bankruptcy Code, including the protection of the automatic stay. This is because the prepetition debtor and the postpetition debtor are "separate and distinct" entities, with different rights and duties.
Why would someone lift the automatic stay? ›
A creditor bringing a motion to lift the automatic stay will likely have secured it's debt with collateral, such as a house a car, and want to sell the collateral because the debtor is: behind on home mortgage or auto payments. unable to maintain insurance. unable to fund a Chapter 13 repayment plan, or.
Tips for recovering from bankruptcy that you can start working at now
- Save all paperwork from your bankruptcy case.
- Start saving money.
- Build a budget.
- Reestablish good credit.
- Regularly monitor your credit reports.
- Maintain your job and home.
- Make an emergency fund.
- Set financial goals.
In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor's discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee.
What is a priority claim Chapter 7? ›
By Cara O'Neill, Attorney · University of the Pacific McGeorge School of Law. A priority claim is a debt the bankruptcy trustee will pay in full before paying less important nonpriority debts.
How do you get around an automatic stay? ›
Creditors Obtaining Relief From the Automatic Stay -- If a creditor properly files and serves a Motion for Relief from the Automatic Stay, and a bankruptcy judge grants the Motion, the Automatic Stay will either be removed or modified so that the creditor can resume collection efforts against the debtor.
What are the exceptions to the automatic stay? ›
The most sought exceptions are actions by parties to securities contracts to close out open positions; eviction of a debtor by a landlord where the lease has been fully terminated prior to the bankruptcy filing; actions by taxing authorities to conduct tax audits, issue deficiency notices, demand tax returns and make ...
How can a creditor violate an automatic stay? ›
From a practical point of view, there are two “types” of violations of the automatic stay that a filer deals with: (1) calls and/or debt collection letters, and (2) continuation of legal action, such as a pending lawsuit, garnishment, foreclosure or repossession.
What is the effective date of Chapter 11? ›
The effective date of a chapter 11 plan is 30 days after entry of the order confirming the plan unless the plan or confirmation order provides otherwise. This Rule was formerly Local Bankruptcy Rule 3016-1(b).
What is the look back period for Chapter 11? ›
Bankruptcy law provides the Trustee with the power to recover certain payments made prior to filing a case. Among these are any payments made to creditors (those to whom you owe money) within 90 days prior to filing a bankruptcy. This is a 90 day lookback period.
What happens when a lawsuit is in automatic stay? ›
Automatic Stay -- Immediately after a bankruptcy case is filed, an injunction (called the "Automatic Stay") is generally imposed against certain creditors who want to start or continue taking action against a debtor or the debtor's property.
Does Chapter 11 wipe out all debt? ›
While Chapter 11 bankruptcy does not typically clear debts, it may allow you to retain assets and to operate a business if you have one. When you file a petition for Chapter 11 bankruptcy, your creditors must suspend attempts to collect the debt and repossess or foreclose on any property.
