What is an Automatic Stay and How Does it Work?
by Unbundled Legal HelpJune 2nd, 2021
For many, bankruptcy is a long-term solution for insurmountable debt. It can have many positive effects in the future, and there are also some immediate benefits to filing bankruptcy, such as the automatic stay.
An automatic stay is a court order that prevents your creditors from taking specific debt collection actions. It’s essentially a mechanism that temporarily stops your creditors from getting their money back. In most cases, the automatic stay is issued as soon as you file bankruptcy paperwork.
It’s important to note that the automatic stay doesn’t apply to all situations. If you are filing bankruptcy for immediate relief from collections activities, it can help to consult with a lawyer first to ensure the automatic stay covers your concerns.
Learn more about what an automatic stay is and what it does below.
What Does Automatic Stay Mean?
An automatic stay is a temporary injunction issued by the courts when bankruptcy filers submit their paperwork. It helps stop certain debt collection activities temporarily, such as:
Most civil lawsuits
Debt collection phone calls
The automatic stay is designed to give debtors time to decide how they will deal with certain debts that may not be discharged or included in their repayment plans. It also helps to stop creditors from making harassing phone calls and other activities so that you can begin the recovery process.
It’s crucial to remember that the automatic stay is only temporary. It’s in your best interest to make your plans and take subsequent actions quickly after it’s issued. In some cases, it can help you contact creditors before the courts do to inform them of the automatic stay and provide them with your case information.
What the Automatic Stay Can’t Prevent
While the automatic stay can stop many types of creditor activities, there are some things that it can’t prevent. They include the following:
Court actions for child support and alimony payments
Debts incurred after you file bankruptcy
Loans against pension plans and retirement accounts
Certain taxes and other types of government actions
If you have filed for bankruptcy more than once in the previous year, the length of the automatic stay may be shortened, or you may not be eligible at all. Check with your bankruptcy lawyer to learn more about how the automatic stay will affect your case.
When Does the Automatic Stay Become Effective?
Generally, the automatic stay becomes effective as soon as you file bankruptcy, hence the “automatic” in the phrase, automatic stay. However, in some cases, the automatic stay can be delayed. In other instances, it does not go into effect at all.
Courts can potentially lift an automatic stay in certain circumstances like during divorce proceedings, or to allow foreclosure on specific properties. If you are unsure of how it will affect your case, check with your attorney for clarification.
Is There an Automatic Stay in Chapter 7?
Yes, there is an automatic stay in Chapter 7 and Chapter 13 bankruptcy. Since Chapter 7 is a liquidation bankruptcy, the automatic stay can temporarily stop debt collection activities like foreclosures and repossessions. Once you receive a discharge, your creditors can resume debt collection activities on property not included in your bankruptcy filing.
The main difference between the two is that an automatic stay can potentially last much longer in Chapter 13 since that process takes more time.
Can it Help With a Foreclosure?
Yes, if you are currently behind on mortgage payments and facing foreclosure, the automatic stay can temporarily stop the proceeding in Chapter 7. During the time it’s in effect, you can catch up on payments or potentially negotiate lower payments.
In Chapter 13, your mortgage payments can be included in a repayment plan, or you may have a few years to become current on payments. So long as you meet the requirements of the court-approved repayment plan, you will likely be able to keep your home, regardless of whether your creditors agree.
How Long Does the Automatic Stay Remain in Effect?
The exact amount of time an automatic stay remains in effect depends on the specifics of your case. However, you can generally expect an automatic stay to remain in place until you receive a discharge, typically within a few months for Chapter 7.
In Chapter 13, it can remain in place for as long as three to five years. This can create huge advantages for those who wish to keep their property and eventually become current on payments.
When Does the Automatic Stay End?
The automatic stay can end under a few different circumstances; those include the following.
You receive a discharge: Once you receive a discharge, your creditors can resume debt collection activities on the property not included in the bankruptcy.
The stay is lifted: In some cases, creditors challenge the automatic stay. If they are successful, a judge may lift the order. The court may also lift the order if you violate the terms of your bankruptcy agreement or provide fictitious information when you filed.
You file a Statement of Intention: The statement is a document that informs your secured creditors of the actions you intend to take (within 30 days) regarding debts you owe in Chapter 7. If you don’t take the steps as outlined in your statement to surrender, redeem, or reaffirm the debt, your creditors may take your property.
Like most issues concerning bankruptcy and automatic stays, it’s in your best interest to consult with a bankruptcy professional to ensure you have a complete understanding of how the automatic stay will affect your case.
Instances When the Automatic Stay Doesn’t Apply
If you choose to keep some property that is not covered by bankruptcy, you can sign a “reaffirmation agreement” wherein you agree to pay some debts in full even after receiving a discharge. If you don’t repay the debt as you’ve agreed, your creditors can take your property and potentially sue you for the rest of the money owed.
Also, if you’ve filed bankruptcy multiple times in the previous year, you may not be eligible for an automatic stay, or its length could be shortened to 30 days. You can potentially petition the court to extend your eligibility for the automatic stay, but it’s not guaranteed the court will approve your request.
Grounds For Relief From Automatic Stay
Creditors can sometimes resume debt collection activities by filing a motion to lift the automatic stay. If they don’t go through the courts for relief, they can’t continue collection actions until after you receive a discharge. Usually, motions asking for relief of an automatic stay involve the following:
Disputes with landlords
Other civil lawsuits
Creditors are most likely to seek relief from an automatic stay if you have little to no equity in the property or you simply can’t catch up on payments.
How to Fight a Motion For Relief From an Automatic Stay
The most important thing to remember when fighting a creditor’s attempts to bypass an automatic stay is that the burden of proof is on you. This means that you must provide the court with detailed information and explanations for every objection you file.
Once the motion to lift the automatic stay has been served, your finances could be at risk. You could potentially lose your home, car, or other types of property.
Since litigation and disputes with creditors can be complicated, if you are defending yourself against a motion to lift the automatic stay, you should work with a proven bankruptcy lawyer in your area.
What Happens if an Automatic Stay is Lifted?
If creditors receive court approval to lift the automatic stay, they can move forward on all debt collection activities. This includes repossessions, foreclosure, phone calls, evictions, etc. While it’s rare for it to happen, it’s certainly possible.
Individuals that wish to keep some property benefit from immediately contacting creditors after the stay is lifted and make an attempt to work out a payment plan that satisfies all parties. Also, you can potentially negotiate a mutually agreeable surrender date or move-out date, so you don’t have to worry about your property disappearing overnight or being locked out of your dwelling.
What Happens if a Creditor Violates the Automatic Stay?
Once they are aware of the automatic stay, most creditors won’t purposefully violate its terms. If they do, they could be held in contempt, face sanctions, or have to pay fines. Sometimes in Chapter 13, a creditor can seek to modify the automatic stay if the debtor is not making payments as agreed to with their trustee on their property (i.e., mortgages and car payments).
Working with an experienced bankruptcy lawyer can help ensure your creditors are immediately notified by email, fax, phone, or physical mail of the automatic stay, limiting the likelihood of a creditor violating its terms.
Unbundled Legal Services Can Help With Your Bankruptcy
Regardless of the type of bankruptcy filed, it can be complex and stressful for most people. Working with a bankruptcy lawyer can help ensure your case goes as smoothly as possible, creditors adhere to the automatic stay, and you’re represented if the automatic stay is challenged in court.
Most lawyers won’t start on your bankruptcy case until you pay them in full. This can present significant issues for individuals that need to file quickly to receive the benefits of an automatic stay.
Our lawyers offer affordable and flexible pay-as-you-go plans, so they can begin working on your case immediately. Our bankruptcy lawyers also offer virtual consultations so that you can start the bankruptcy process from the comfort and safety of your home.
Ready for a fresh financial start? Get instantly connected with an unbundled bankruptcy lawyer in your area, and begin the bankruptcy process today.