The Automatic Stay is one of the basic concepts of bankruptcy law and is the fundamental protection that filing a case brings you. It is codified in Section 362 of the Bankruptcy Code.
The moment you file your case, your creditors are “stayed” from taking any action against you. That means no debt collection attempts, no foreclosures, no repossessions, no lawsuits, no garnishments, no levies, no letters or phone calls.
The Automatic Stay last for the duration of your case. For people filing Chapter 7 cases, the Automatic Stay is what stops lawsuits or wage garnishments that may be pending against you until you receive a discharge order at the end of your case.
In Chapter 13 cases, the Automatic Stay remains in effect for the entire five years of a typical plan. The Automatic Stay is what prevents a mortgage holder from proceeding with foreclosure actions while you are using your Chapter 13 plan to catch up on mortgage arrears. It is what prevents the holder of a student loan from trying to collect any more than what they are receiving from the trustee.
If a creditor violates the Automatic Stay, it can be subject to sanctions by the Bankruptcy Court, and an injured debtor can recover actual damages, attorney fees, and punitive damages.
Secured creditors may seek relief from the Automatic Stay, but only if they are not receiving payments that “adequately protect” their interest in the property.
Additionally, if you have had another bankruptcy case dismissed in the prior year, the Automatic Stay in the subsequent case only last for a month unless you obtain an order from the court extending it.
A few critical things to know about the Automatic Stay:
- It only comes into effect when you file your case with the court, so give your lawyer enough advance time to prepare your case.
- Notice to your creditors isn’t necessary for it to take effect (it is automatic), but in order to sue a creditor for violating it, the violation must have been willful (i.e. they had notice but committed the violation anyway).
- It only protects you from collection attempts on debts incurred before you case is filed. For debts incurred later, you’re fair game to debt collectors.
- Once your case is closed, the Automatic Stay ends, so if you have non-dischargeable debts (e.g. taxes, mortgage/car loan arrears, or student loans), consider Chapter 13.
As always, there are qualifications and nuances to all of the above, and your situation is unique. Be sure to talk to a lawyer if you’re considering a bankruptcy case.