Chapter 7 gives you immediate protection against creditor collection actions. Chapter 13 protects you longer, if needed.
The automatic stay is the very strong legal protection from your creditors you receive when you file a bankruptcy case. The automatic stay stops virtually all attempts by creditors to collect their debts against you, your money, and your property. It goes into effect at the moment you or your lawyer files your bankruptcy case.
To “stay” means to stop or suspend. As in a stay of execution. In bankruptcy it refers to the stopping of almost all collection activity against a debtor. (See the list of types of all the kinds of actions that the automatic stay stops at U.S. Bankruptcy Code Section 362(a).)
In our last blog post we showed that a voluntary bankruptcy case is begun by the filing of a “petition.” That filing itself “constitutes an order for relief.” (See Section 301(b).)
A filed bankruptcy petition itself “operates as a stay.” You don’t need to get a separate court order or injunction because the filing initiates the stay. (Section 362(a).)
The stay is enforced against everyone who claims you it owe a debt. The automatic stay is “applicable to all entities”—to all creditors, whether they are individuals, corporations, or partnerships. (Section 362(a) and Sections 101(15) and 101(41).)
Applies to All Bankruptcy Chapters
The automatic stay stops creditors largely the same whether you file a Chapter 7, 11, 12, or 13 case. Chapter 11s are rarely filed by consumers and small business. Chapter 12s are for certain family farmers and fisherman, and are even more rare. So we’ll focus here on Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.
The big difference between Chapter 7 and 13 is how long the automatic stay protection lasts.
In Chapter 7
The automatic stay protection usually lasts in Chapter 7 as long as your Chapter 7 case lasts. That’s usually three to four months.
As to most debts, that’s just long enough. By that time the debts that you want to discharge (legally write off) are discharged. The bankruptcy judge signs the order discharging your debts just before the end of the case. After that those creditors can’t take any further collection action on the debts since you no longer owe the debts. So you no longer need the automatic stay for your protection.
However, you may have some other debts which you would continue to owe after you finish your case. You generally owe those debts for one of two reasons.
1) You want to pay it. For example, you want to keep a vehicle on which a creditor is the lienholder, and so you “reaffirm” the debt.
2) You are legally required to pay it. For example, a recent unpaid income tax obligation can’t be discharged (unless it meets a set of conditions).
Often you don’t need automatic stay protection for debts that survive a Chapter 7 case.
With a vehicle loan, you could enter into a “reaffirmation agreement” with the vehicle creditor. That would exclude that debt from the discharge of your other debts. You’d keep the vehicle, and continue making the payments on that one debt.
With an income tax debt, before your Chapter 7 case is finished you or your bankruptcy lawyer would negotiate a reasonable monthly installment payment plan with the IRS or state tax authority.
Either way you wouldn’t need further protection from the creditor as long as you did whatever you agreed to do.
In Chapter 13
The automatic stay protection under Chapter 13 usually lasts much, much longer than under Chapter 7. That’s because a Chapter 13 case lasts so much longer—3 to 5 years instead of about 3 months. This much longer protection can give you much more time to pay certain kinds of debts that you must pay or want to pay. And the automatic stay protects you during that length of time.
We’ll show how this works with the two examples above—the vehicle loan and the recent tax debt.
With a vehicle loan, you’d be in trouble under Chapter 7 if you’d fallen behind and could not get current within a month or two after filing the case. Most creditors would not allow you to keep the vehicle. In contrast, under Chapter 13 you’d likely have several years to bring the account current. The creditor has only limited grounds for objecting to this. As long as you made your payments as required by your court-approved plan, you’d be protected from the creditor throughout this time.
As for a recent income tax debt, you would have to pay it under either Chapter 7 or Chapter 13. But Chapter 13 would likely give you more time and more flexibility to pay it. You would likely be able to delay paying anything on the tax for a number of months. That would enable you to pay other debts that were even more time-pressing, like a home mortgage arrearage. You would just have to pay it off (along with the rest of the payment plan) within 5 years. Most of the time you would not pay any ongoing tax penalties or interest, saving you more money. Throughout this time you’d be protected from any collection action by the IRS/state because of the automatic stay.
Chapter 7 vs. 13 Summary
So, the automatic stay stops creditor collections immediately when either a Chapter 7 or Chapter 13 case is filed. The relatively short-lived automatic stay in Chapter 7 works well enough if all your debts get discharged. Or if you do still owe any debts when the case is done, you’re able to make reasonable arrangements to pay what you still owe. However, if you need the automatic stay protection to last longer, then Chapter 13 often gives you that extra protection. Then you’ll have much more time and more flexibility to deal with special creditors.