In a nutshell, the automatic stay freezes any and all collection actions that creditors may take against you and your assets during the duration of your bankruptcy proceeding. There are two reasons folks file bankruptcy - the automatic stay and the discharge. The former is often referred to as the “stay.” 

The automatic stay occurs in both Chapter 7 and Chapter 13 and has two purposes:

Terminate collection actions of creditors against you, your assets, and the assets of the bankruptcy estate. This essentially provides you and the parties involved in your bankruptcy the space to liquidate your assets (Chapter 7) or reorganize assets (Chapter 13) without creditors interfering. 
Terminate the “race to the courthouse,” which is an informal term used to describe the rule that gives priority to the first creditor to record a lien, judgment, deed of trust, or deed with the County Recorder, regardless of when the documentation is dated. Essentially, this means that the first creditor to record a lien or judgment against you will get paid first. The automatic stay stops the race in its tracks and provides the bankruptcy trustee the ability to focus on distributing your assets equitably and fairly. 

Creditors Cannot Take Action Against You

The stay typically goes into effect the very second that your bankruptcy petition is filed in court. In most cases, it remains in effect for the span of your bankruptcy case and lasts until your case is dismissed or discharged. However, there are exceptions to these rules, which we will discuss in a moment. 

But, first, an answer to a quick and common question. Debtors often wonder: How are creditors aware of the automatic stay? The answer is - it does not matter if they have been made aware of the stay or not. According to federal law, as soon as your automatic stay is in place, all of your creditors must immediately terminate all collection actions. If creditors attempt to take action against you, let them know that you have filed bankruptcy and an automatic stay is in place. You can also refer them to your attorney for further information. 

If creditors do attempt collection actions against you and your assets and a stay is already in place, those actions are voidable and can typically be reversed. Furthermore, intentional violation of the automatic stay may result in the court sanctioning the creditor. 

Exceptions to the Automatic Stay

There are instances in which the automatic stay is limited or will not occur at all. If you filed bankruptcy within the past 12 months, you might have a problem with your stay. Additionally, some creditors may have the right to continue to take action against you during the stay. The following describes the circumstances in which the stay is limited or does not protect you. 

Prior Bankruptcies

If you file another bankruptcy within one year of a prior bankruptcy dismissal, your stay only lasts 30 days. If you filed two or more bankruptcy petitions and they both were dismissed within a 12 month period, and then you file another bankruptcy petition, there will not be a stay the third time around. This is because Bankruptcy Code and courts presume that you are filing bankruptcies in bad faith after prior dismissals. 

You might get lucky. Some of your creditors may halt any actions against you, but more knowledgeable creditors will still continue to collect and the end result could be detrimental. Like losing your car or house. If you are worried about this happening, you can request the judge “impose the automatic stay.” The same procedure applies if your stay is limited and you want to ask the judge to extend the 30 day limitation.  

Before you can ask the judge for either, though, you will be required to serve your creditors with a motion, which can take a substantial amount of time. The judge will expect you to produce evidence demonstrating that your current case was filed in good faith. Take note: a creditor can still object to your motion.   

Creditors and Other Situations 

Some creditors are exempt from the stay, meaning the stay does not take the ability to collect from you away from these creditors. 

Here are the most common exceptions:

Child Support and Alimony

Chapter 7 bankruptcy does not stop the person who is owed child support, alimony, or back pay from continuing to collect it. This means that your wages and bank account can still be garnished and your tax refund can be seized. The rules for back pay for either of the two are different for Chapter 13.

Divorce & Family Proceedings

If you are facing an impending divorce or other family proceeding, your spouse or anyone acting on behalf of your spouse or a child can continue with the proceeding. These proceedings can include, but are not limited to: addressing domestic violence issues, dissolving a marriage, establishing the paternity of a child, determining or altering the amount of support, or settling child custody or visitation. On the other hand, if dissolving a marriage requires dividing the couple’s assets or debts, it is a violation of a Chapter 7 stay. 

Criminal Matters

If you are facing an impending criminal case, the district or prosecuting attorney can commence or continue actions against you. This can include something as incidental as a ticket for a traffic violation.  
Taxes. The majority of tax situations are exempt from the automatic stay. The IRS and other tax agencies are allowed to demand that you pay any unpaid taxes. They can also audit your taxes during your stay. There are rare instances in which a tax agency is even permitted to file a lien on your assets during your stay.  

Creditors Seeking Relief From Stay

Creditors have the right to ask the judge to provide them relief from the stay. Usually, creditors ask the judge to lift the stay for the particular debt you owe them so they can begin or resume collection actions against your assets. Fortunately, creditors can only ask for relief from the stay if:

You do not have equity in the asset that secured your loan; or
For “cause,” which means the creditor must prove to the judge that they have good reason to be granted relief from the stay.

The automatic stay is a breath of fresh air for the majority of Chapter 7 filers. Just knowing that creditors can no longer threaten to put liens on property or take assets away is a huge relief. The harassing phone calls stop and the intimidating letters no longer arrive in the mail. The automatic stay is also a hint of what is coming - your fresh financial start. 

Are You Considering Filing For Bankruptcy? If you feel bankruptcy is the best option for your financial situation you need to speak with an experienced bankruptcy lawyer as soon as possible. Please contact us online or call our office directly at 888.348.2616 to schedule your free consultation.

Are You Considering Filing For Bankruptcy?

If you feel bankruptcy is the best option for your financial situation you need to speak with an experienced bankruptcy lawyer as soon as possible. Please contact us online or call our office directly at 888.348.2616 to schedule your free consultation.

James Roswold
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James Roswold is a Kansas & Missouri personal injury, workers comp, and medical malpractice attorney.