Chapter 2 The Automatic Stay

• Library: How to File for Chapter 7 Bankruptcy (Nolo) (2022 Ed.)

CHAPTER 2 The Automatic Stay

Actions Prohibited by the Stay

Credit Card Debts, Medical Debts, and Attorneys' Fees

Public Benefits

Debt Associated With Criminal Proceedings

IRS Liens and Levies

Foreclosures

Utilities

When the Stay Doesn't Apply

Actions Not Stopped by the Stay

How You Can Lose the Protection of the Stay

Evictions

If the Landlord Already Has a Judgment

Endangering the Property or Illegal Use of Controlled Substances

One of the most powerful features of bankruptcy is the automatic stay: a court order that goes into effect as soon as you file and protects you from specific actions by your creditors. The automatic stay stops most debt collectors dead in their tracks and keeps them at bay for the rest of your case. Once you file, all collection activity (with a few exceptions, explained below) must go through the bankruptcy court. Most creditors cannot take any further action against you directly while the bankruptcy is pending.

The purpose of the automatic stay is, in the words of Congress, to give debtors a "breathing spell" from their creditors and a break from the financial pressures that drove them to file for bankruptcy. In a Chapter 7 bankruptcy, it serves another purpose as well: to preserve the status quo at the time you file. The automatic stay ensures that the trustee and the court—not your creditors—will be responsible for ultimately deciding which property you will be able to keep, which property you will have to give up, and how the proceeds will be divided if the trustee takes and sells any of your belongings.

This chapter explains how the automatic stay applies to typical debt collection efforts, including a couple of situations in which you might not get the protection of the automatic stay. It also covers how the automatic stay works in eviction proceedings, vital information for any renter who files for bankruptcy.

TIP

You don't need bankruptcy to stop your creditors from harassing you. Many people begin thinking about bankruptcy when their creditors start phoning them at home and on the job. Federal law (and the law of many states) prohibits this activity by debt collectors once you tell the creditor, in writing, that you don't want to be called. And if you orally tell debt collectors that you refuse to pay, they cannot, by law, contact you except to send one last letter making a final demand for payment before filing a lawsuit. While just telling the creditor to stop usually works, you might have to send a written follow-up letter. (You can find a sample letter in Ch. 1.)

Actions Prohibited by the Stay

When you file for any kind of bankruptcy for the first time, the automatic stay goes into effect. It's "automatic" because you don't have to ask the court to issue the stay, and the court doesn't have to take any particular action to make it effective. Once you file, the stay is put in place automatically. The stay prohibits creditors and collection agencies from taking any action to collect your debts unless the law or the bankruptcy court says they can.

In some circumstances, the creditor can file an action in court to have the stay lifted called a Motion to Lift Stay or a Motion for Relief From Stay. In others, the creditor can simply begin collection proceedings without seeking advance permission from the court.

The good news is that the most common type of creditor collection actions are still stopped dead by the stay. These include harassing calls by debt collectors, threatening letters by attorneys, lawsuits to collect payment for credit card and health care bills, and actions to recover property, such as car repossessions, home foreclosures, and wage garnishments. This section explains which collection actions are stopped by the automatic stay.

Credit Card Debts, Medical Debts, and Attorneys' Fees

Anyone trying to collect credit card debts, medical debts, attorneys' fees, debts arising from breach of contract, or legal judgments against you (other than for child support and alimony) must cease all collection activities after you file your bankruptcy case. A creditor or collector cannot:

• file a lawsuit or proceed with a pending lawsuit against you
• record liens against your property
• report the debt to a credit reporting bureau, or
• seize your property or income, such as money in a bank account or your paycheck.

Warning: Stop Your Bank From Draining Your Account

You know it's a bad day when you try to use your debit card only to find out that your credit card company wiped out your bank account. If your rent money is gone, you're probably facing a genuinely catastrophic situation. To put it plainly, it is risky to bank at an institution that also issued you a credit card or loan. If you do, and you fall behind on your payment, the bank can dip into your checking and savings account funds using a nasty collection trick called a "setoff," something you likely gave your bank permission to do when you signed your credit agreement.

Fortunately, you'll only have to worry about this before you file bankruptcy because once filed, the automatic stay prevents your creditors from surprising you with these devastating collection maneuvers. Keep in mind, though, that your bank could still "freeze" funds to cover your debts. (See "Bank Setoffs v. Account Freezing," below.)

In the meantime, there is an easy work-around for this pitfall. To prevent your bank from emptying your account, make sure the bank you get a credit card or loan from is different from the bank where you have a checking or savings account. If they're the same, switch your checking and savings accounts to another bank.

Public Benefits

Government entities seeking to collect overpayments of public benefits, such as SSI, Medicaid, or Temporary Assistance to Needy Families (welfare) benefits, cannot try to...