Making Sense of Bankruptcy: How Filing a Chapter 7 or 13 Case Stops Creditors’ Actions against You

Federal bankruptcy laws override state collection laws, protecting you and your assets from debt collection.

 

In this “Making Sense” series, we’re explaining bankruptcy through individual sentences about each of its important concepts.

Today’s sentence:

Filing a consumer bankruptcy case immediately stops and then prevents almost all actions by creditors against you personally or against your income and assets.  

These word and phrases in bold are each explained in the following sections.

Immediately Stops Creditor Actions

Creditors are stopped from taking any action to collect on their debts instantaneously at the filing of your bankruptcy case. This legal freeze against them—the powerful “automatic stay”—is imposed upon your filing.

How does the “automatic stay” get imposed so fast? Because there is no additional procedure needed—no delay while a judge signs an order, for example. Your filed bankruptcy petition itself “operates as a stay, applicable to all entities.” That’s why it’s called “automatic.”

Creditors do need to be informed of the bankruptcy filing. But once they are informed they almost always know better than to take any further action to collect.

And if any creditor is so uninformed or so foolish as to act in spite of the “automatic stay” forbidding it, they can be punished. Creditors’ hands are slapped just often enough that most don’t violate the “automatic stay.”

Preventing Future Creditor Actions

If a creditor hasn’t yet taken some specific action to collect a debt—for example, sued you, or repossessed your vehicle—the “automatic stay” will prevent the creditor from taking that action, as long as the “automatic stay” is in effect at the time.

The “automatic stay” remains in effect in a Chapter 7 “straight bankruptcy” case during the 3 or 4 months that those cases usually last, and in a Chapter 13 “adjustment of debts” case during the 3 to 5 years that those cases usually last. If the debt at issue is discharged (legally written off) in the Chapter 7 or 13 case, then the “automatic stay” is no longer needed because the discharge itself prevents the creditor from pursuing the debt any longer.

A creditor can ask the bankruptcy court to end the “automatic stay” as to its debts so that it can again pursue the debt or the collateral securing the debt. After an opportunity for a hearing, the court may give the creditor the requested “relief from the automatic stay” only under certain conditions—for example the court may give permission to repossess a vehicle if the debtor is not keeping up the payments or lets the insurance lapse.

Almost All Collection Action is Covered

There are some exceptions to the types of creditor actions that are stopped by the “automatic stay,” based on policy considerations. In other words, Congress has decided that in certain select situations a bankruptcy filing should not stop the collection of specific kinds of debts. For example, neither a Chapter 7 nor a Chapter 13 filing stops the monthly collection of ongoing child or spousal support. Also, the collection of criminal fines is not stopped by a bankruptcy filing—indeed criminal proceedings are altogether not affected by bankruptcy. Certain kinds of family court proceedings are also unaffected, as are certain limited actions by taxing authorities.

However, in general the “automatic stay” is “applicable to all entities” and covers virtually all actions to collect a debt.

But how can actions against you to collect a debt, which are otherwise legally authorized under state law, become illegal once you file bankruptcy?  It’s because the U.S. Constitution, from the very beginning, gave Congress the power to make laws governing bankruptcy.  And federal law trumps state law whenever they conflict. The “automatic stay” is the law of the land.

Actions against You Personally and Against Your Assets

The Bankruptcy Code provides a rather thorough list of actions that are forbidden by the “automatic stay.” They include, for example, the “commencement or continuation… of a judicial, administrative, or other action or proceeding against the debtor”; “the enforcement… of a judgment obtained before the commencement of the [bankruptcy] case”; “any act to obtain possession of property”; “any act to create, prefect, or enforce a lien”; any act to collect, assess, or recover a claim against the debtor.” Your creditors can’t pursue you, your income, or your assets to collect their debts. They have to work within whatever limitations the bankruptcy procedures impose.

Under Chapter 13 the “co-debtor stay” can even protect a co-signer who is not filing bankruptcy, under certain conditions. That will be the topic of our next blog post.

The Sentence Explained

But first to finish today, the sentence we started with is:

Filing a consumer bankruptcy case immediately stops and then prevents almost all actions by creditors against you personally or against your income and assets.

The summary explanation:

The moment a bankruptcy case is filed on your behalf the “automatic stay” is simultaneously imposed, even before your creditors know about it. This federal “stay” pre-empts virtually all state laws, covering just about every possible mode of collecting a debt. The few exceptions are mostly commonsensical, or allow collection of exceptional debts such as child support or criminal fines. The “automatic stay” prevents the grabbing of your money for payment of debts and the grabbing of collateral securing the debts.