The Basics: Protection from Creditors
Filing bankruptcy immediately protects you and your property from just about any kind of collection attempt by your creditors.
The part of federal bankruptcy law commonly referred to as the “automatic stay” protects you from your creditors during a bankruptcy case.
What the Law Says
A bankruptcy “petition… operates as a stay, applicable to all entities.” In other words, a bankruptcy filing itself acts to stop all creditors. (See Section 362(a) of the Bankruptcy Code.)
But WHAT does it stop your creditors from doing?
- Suing you, or continuing a previously filed lawsuit
- Enforcing a previously obtained judgment against you
- Taking possession of your property
- Creating or enforcing a lien against your property
- Acting in any way to collect a debt which existed at the filing of your bankruptcy case
Purpose of the Automatic Stay
When Congress passed the modern Bankruptcy Code in 1978—thirty-five years ago—it described this essential element as follows:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.
But the automatic stay is actually designed for both your benefit AND that of your creditors.
The dual purpose of providing the debtor a “fresh start” and equitable distribution of the debtor’s property to creditors commonly have been referred to as the twin goals or policies of the Bankruptcy Code. At the center of these purposes is the automatic stay.
Clifton R. Jessup, Jr., June 1995, American Bankruptcy Institute.
Since this protection stops creditors from taking pot-shots at you, it evens the field among all your creditors. It discourages any of them from being overly aggressive, because the automatic stay assures them everyone will be treated fairly.
Without it, certain creditors would be able to pursue their own remedies against the debtor’s property. Those who act first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally.
Jessup, June 1995, ABI
To preserve your property, both for yourself and potentially for your other creditors, the automatic stay needs to be very fast and needs to apply to all kinds of collection efforts.
As stated at the beginning of this blog, the mere filing of the bankruptcy “petition… operates as a stay, applicable to all entities.” It doesn’t take a judge’s order, and it does not give your creditors or anybody else an opportunity to object, at least not right away. The automatic stay is indeed automatic.
The automatic stay protects you and your assets in just about every possible way from aggressive creditors. It stops all phone calls and letters from them, their garnishments and lawsuits, the imposition of liens—“any act to collect, assess, or recover” a debt. The automatic stay also stops vehicle repossessions and home foreclosures, stops the IRS from recording a tax lien, and creditors from suing you from getting a judgment and judgment lien—“any act to create, perfect, or enforce any lien.” (Section 362(a)(2)-(6).
Exceptions to the Automatic Stay
There are certain limited kinds of actions that are not stopped by the automatic stay. These include all criminal proceedings; family court matters involving child custody/visitation, paternity, domestic violence, marital dissolution other than property settlement, and most collection of child/spousal support.
Also, under certain circumstances you can lose your right to the automatic stay as to ANY of your creditors if you filed a recent bankruptcy case (or two) that was subsequently dismissed.
“Relief from Stay”
The automatic stay gives you relief from creditors’ collections, but any creditor can file a motion at bankruptcy court asking for relief from the automatic stay—for the right to undo its protection. These motions are most commonly filed by secured creditors wanting to continue to pursue their collateral—to repossess a vehicle or foreclose on a house.
In deciding whether to grant the creditor’s motion, the court weighs many possible factors, often including your payment status, your intent to make future payments, your ability to fulfill those intentions, and the value of the collateral in relation to the amount of the debt. (Section 362(d)-(g).)