When your debts pile up, filing for bankruptcy can give you the time you need away from debtors to plan a solution.
Under U.S. bankruptcy laws, an automatic stay prevents creditors from taking action against a debtor’s assets. This includes freezing bank accounts, seizing property, and collecting debt-related expenses. If you file for bankruptcy, an automatic stay will go into effect, which will stop creditors and other collection agencies from trying to collect your debts.
However, if you’re considering filing for bankruptcy and taking an automatic stay, there are limitations and requirements you must know.
So let’s find out how you can make the most of your automatic stay!
What is an automatic stay in bankruptcy?
An automatic stay is an order that stops all proceedings in a bankruptcy case until the court can decide what to do. An automatic stay prevents some creditors from continuing to pursue the collection of debt against someone.
Lenders will not repossess your home or car if you are past due on your mortgage or car loan and file for bankruptcy. Both Chapter 7 and Chapter 13 bankruptcies provide an automatic stay. This means that creditors cannot take any action against the debtor until the bankruptcy is over.
Chapter 7 is bankruptcy, in which your property is sold to repay your outstanding debt. Chapter 13 is a bankruptcy law that helps people reorganize their debts. Your property is not sold, but you are bankrupt until your repayment plan is complete.
If you file for bankruptcy, you can stop creditors from collecting your debt. However, you can still work out your finances and avoid creditor harassment if you file for an automatic stay.
How does automatic stay in bankruptcy work?
Under Section 362 of the United States Bankruptcy Code, a bankruptcy stay goes into effect when a debtor files for bankruptcy. The automatic stay applies to individuals, businesses, and all of the chapters of the Bankruptcy Code.
It does not apply to entities that are not debtors, such as corporate affiliates, corporate officers, co-defendants, or guarantors.
The automatic stay protects the debtor from certain actions by creditors, including starting or continuing court proceedings against the debtor, moving to foreclose on a debtor’s property, creating, perfecting, or enforcing a lien against a debtor’s property, and attempting to repossess the collateral.
The main goal of the automatic stay is to ensure that all creditors have an equal chance to get their hands on a debtor’s assets and to prevent one creditor from taking advantage of others.
If an automatic stay goes into effect, creditors are unlikely to receive the full amount. The creditors of the insolvent debtor will receive a share of the debtor’s limited assets in proportion to their share of the debtor’s liabilities.
While your debtors are held off, there’s enough time to figure out a strategy to recover from your debt as soon as possible!
The types of debts included in an automatic stay
There are certain cases where the automatic stay does and does not apply. Whether you can avail of this option depends on your type of debt. So here are debts where you can file an automatic stay for bankruptcy:
An automatic stay stops foreclosure proceedings, which means you can keep your home as long as your bankruptcy case is open.
If you file for bankruptcy and your automatic stay goes into effect, your utility provider cannot terminate your service for at least 20 days.
There are different eviction timelines in each state. Suppose your landlord filed for eviction before your bankruptcy filing but hasn’t yet gotten an eviction judgment from the housing court. In that case, an automatic stay may prevent you from being evicted.
An automatic stay will stop your wages from being garnished if you have filed for bankruptcy. Debt can be discharged in bankruptcy depending on the type of debt.
What types of debts are exempt from an automatic stay?
Some debts are not automatically stayed when you file for bankruptcy. Those include payments for child support and alimony, as well as money owed as a result of a criminal proceeding.
The Internal Revenue Service can’t attempt to collect the debtor’s tax debts or put a lien on their property during an automatic stay, but it can seize their tax refund.
The duration of an automatic stay in bankruptcy
Usually, a stay of proceedings remains in effect as long as your bankruptcy is in effect. Still, the type of bankruptcy will determine how long it will remain.
Chapter 7 takes about a few months. It may take up to five years to finish Chapter 13. If you have had a bankruptcy case dismissed in the past year, the automatic stay will last only 30 days. A high number of pending cases may not be eligible for a stay.
If your automatic stay is lifted or you close your case willingly, debt collectors and lawsuits will be able to reach you again. Debt collectors and creditors can file a motion to lift the stay before closing the bankruptcy case.
The court may grant their request if the creditor can show that an automatic stay will harm their business. You can rest assured that the case will buy you the set time, and you should ask your lawyers or consultants for advice to plan debt repayment during this time.
A word of advice
Avoid falling for scams promising quick and easy recoveries from bankruptcy, and stay away from companies that request money to rebuild your credit. Your credit score will likely not look very good for a while, so be careful not to fall into old habits, like running up credit cards, missing minimum payments, and buying things you can’t afford.
Try using cash whenever possible until you can use your credit card responsibly. If you get a credit card, consider a secured credit card that reports your payments to the major credit bureaus, it will help you get positive account activity while spending cautiously.