Chapter 2 The Automatic Stay

• Library: Chapter 13 Bankruptcy (Nolo) (2020 Ed.)

CHAPTER 2: The Automatic Stay

How the Automatic Stay Works

How Long the Stay Lasts

How the Stay Affects Common Collection Actions

Home Foreclosures

Vehicle Repossessions

Credit Card Debts, Medical Debts, and Attorneys' Fees

Public Benefits

Criminal Proceedings

IRS Liens and Levies

Utilities

How the Stay Affects Actions Against Codebtors

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 Using Controlled Substances

One of the most powerful features of bankruptcy is the automatic stay—an injunction (a court order prohibiting an action) that goes into effect as soon as you file. The automatic stay stops most debt collectors dead in their tracks and keeps them at bay for the rest of your case (with some exceptions, explained below).

This chapter explains how the automatic stay protects you from typical debt collection efforts, and discusses situations when the stay might not apply. It also explains how the automatic stay protects your codebtors from collection activities and 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 prohibits debt collectors from doing this once you tell the creditors, in writing, that you don't want to be called. And if you orally tell debt collectors that you refuse to pay, it is illegal for them to contact you except to send one last letter making a final demand for payment before filing a lawsuit. While just telling a creditor to stop usually works, you might have to send a written follow-up letter. (You can find a sample letter in Ch. 1.)

How the Automatic Stay Works

The automatic stay is "automatic" because you don't have to ask the court to issue it, and the court doesn't have to take any particular action to make it effective. The stay goes into effect automatically when you file your bankruptcy case. The stay prohibits creditors and collection agencies from taking any action to collect most kinds of 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 or modified (called a "motion to lift stay" or a "motion to modify stay"). In a few other situations, the creditor can simply begin collection proceedings without seeking advance permission from the court.

How Long the Stay Lasts

Unless it is lifted by the bankruptcy court, the stay will remain in effect until one of the following happens:

• The court confirms your Chapter 13 plan (see Ch. 10).
• Your case is dismissed.

When the court confirms your Chapter 13 plan, the automatic stay is replaced by an injunction in the confirmation order, but the effect is essentially the same. If you are current on your payment obligations under the plan, the injunction prohibits creditors from taking action against you. Even if you do fall behind on plan obligations, most creditors must get bankruptcy court permission before they are permitted to take action. However, it's never a good idea to fall behind on plan payments because it could result in your case being dismissed.

How the Stay Affects Common Collection Actions

Most common types of creditor collection actions are stopped by the stay—including harassing calls by debt collectors, reporting debts to credit reporting bureaus, threatening letters by attorneys, and lawsuits to collect payment for credit card and health care bills.

Home Foreclosures

Many people file for Chapter 13 bankruptcy to prevent losing their homes in foreclosure. The automatic stay will temporarily prevent a foreclosure no matter which type of bankruptcy chapter is filed. However, in Chapter 7 bankruptcy, a creditor can often ask the court to lift the stay and, if granted, proceed with the foreclosure. By contrast, the foreclosure can be permanently stopped in a Chapter 13 bankruptcy.

EXAMPLE: Angel owns his home. He has been faithfully making his monthly mortgage payment of $900 for eight years and has incurred $50,000 worth of credit card debt. In May 20xx, Angel's job at a local tech company is outsourced and he's laid off. Although he obtains another job at a much lower salary, he can't keep up with his bills and falls two months behind on his mortgage payments. Soon thereafter, he receives a notice of intent to foreclose from his lender.
Angel visits a bankruptcy lawyer, who explains that he can file for Chapter 7 bankruptcy to wipe out the credit card debt, but because Chapter 7 doesn't have a mechanism to bring a mortgage current, he will lose the house unless he can catch up on his mortgage. The lender will either get permission from the bankruptcy court to proceed with the foreclosure or will wait until after the Chapter 7 case ends to sell the home at auction. On the other hand, if Angel files for Chapter 13 bankruptcy, he can stop the foreclosure and pay off the back payments through his Chapter 13 plan.

CAUTION

You can't keep foreclosure at bay indefinitely by filing a string of bankruptcies. Don't expect to get away with game playing in bankruptcy court. If the court lifts the stay to allow a lender to foreclose, you can't dismiss the current case, file another Chapter 13, and stop the foreclosure again. The automatic stay has limits that prevent filers from using the bankruptcy process in bad faith. Specifically, the automatic stay won't go into effect if the court lifted the stay to allow the lender to foreclose in a case filed within the previous two years.

EXAMPLE: Julie falls three months behind on her mortgage and receives a notice of intent to foreclose from her lender. Julie stops making any further payments and tries to sell her home to recover her remaining equity, but she can't find a buyer. Julie files for Chapter 7 bankruptcy to prevent her home from being sold at auction. The

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