Protection for Debtors Through the Automatic Stay

People mired in debt may be afraid of losing their home or car, but the stress of constant phone calls and threatening letters from dogged bill collectors can be too much for one to bear. Fortunately, most debt can be eliminated through bankruptcy, and one of the principal benefits of filing is the automatic stay. This article will describe how the stay protects bankruptcy debtors, and how it can be used to promote a fresh financial start.

How the Stay Works

The automatic stay functions as an instant injunction to all collection actions on any debt the debtor seeks to have discharged. It is effective immediately upon the filing of a bankruptcy petition, and it prevents creditors contacting debtors by telephone, in-person or sending letters demanding payment.

Other Protections Under the Stay

The stay also stops all debt-related litigation against the debtor. Essentially, any claims against the debtor are now claims against the bankruptcy estate, and must be pursued in bankruptcy court. As such, any pending lawsuits against a debtor are suspended and creditors may not initiate lawsuits to collect on debts listed in the petition. Collection proceedings against tax debts are also stayed (even though tax debt is not usually dischargeable), and wage garnishment actions may not proceed until the bankruptcy itself is finished.

Further, creditors may not enforce judgments during the stay, and no action may be taken to enforce a lien against property that is part of the bankruptcy estate. Debtors may not be found in contempt for failing to pay child support during the stay (though they might still face interest charges that accrue on any support arrearage), and they may not lose utility services without the stay being lifted. A debtor's property (such as a car or boat) may not be repossessed, and foreclosure actions are suspended. However, the stay will not affect a foreclosure sale that has been completed before the filing of a petition.

How Long Does the Stay Last?

The duration of the stay depends on the type of bankruptcy protection sought. In general, the stay is effective until one of the following instances occurs:

  • the bankruptcy case is closed
  • a discharge of the debt is granted (or denied)
  • the bankruptcy case is dismissed

In Chapter 7 cases, the stay is usually in place until the discharge is granted at the end of the case (commonly 90 days after petition has been filed). In Chapter 13 cases, the stay is lifted once the plan payments are completed.

Creditors may petition the bankruptcy court to have the stay lifted if they believe that the stay is not serving its intended purpose, and is merely a ruse to delay legitimate collection actions. The court may grant such relief in limited circumstances (e.g. where the debtor has no equity in real estate to be protected).

Legal Protections Under the Stay

When a bankruptcy petition is filed, all named creditors are notified that the debtor has sought bankruptcy protection. The notice provides instructions on how to pursue a claim and be included in any bankruptcy settlement and warns against violating the automatic stay.

Creditors who contact debtors regardless of the stay may be held in contempt of court, and the law allows debtors to recover money damages (including attorney's fees and punitive damages) for "willfully" violating the stay. Debtors may recover damages for emotional distress, loss of use of any repossessed items, as well as time spent defending against collection efforts.

Since bankruptcy notices are automatically sent to creditors after the petition is filed, creditors are held strictly liable for contacting debtors during bankruptcy proceedings. In essence, creditors cannot claim that they did not know that a bankruptcy had been filed, and there is no "good faith" exception that will protect them from unlawful collection actions. This is especially important considering that most collection letters are sent by automated systems, and unwitting debtors are likely to send payments out of fear of ruining their chance of obtaining a discharge.

Ultimately, the stay provides debtors with peace of mind and stability by protecting them from litigation and creditor harassment, and is one of the debtor's most valuable advantages. If you have questions about other protections under the automatic stay, an experienced bankruptcy attorney can advise you.