The Automatic Stay: How It Protects You When You File Bankruptcy
By: Carron Armstrong
Calling a debtor after a bankruptcy is filed can be a violation of the automatic stay. One of the most powerful tools in your bankruptcy tool box is the automatic stay. The automatic stay is an injunction that goes into effect when the case is filed. An injunction is a court order usually designed to prevent someone or some entity like a company from taking some kind of action. When a bankruptcy case is filed, this injunction or “stay” goes into effect to immediately limit what creditors can do with respect to collecting a debt from the person filing or with respect to taking charge of the filer’s property to satisfy the debt through repossession, foreclosure, garnishment or other means.
Co-Debtor or Co-Borrower Stay
In a Chapter 13 case, the automatic stay also protects the debtor’s co-borrower. Creditors are not allowed to take collection action against someone who signs on a debt with a debtor, even if the co-borrower does not file bankruptcy himself. It is important to note, however, that this co-debtor stay does not apply in a Chapter 7 case. This protection is so important to some filers that they will choose to file a Chapter 13 case rather than a Chapter 7 case to protect a co-debtor. To learn about other reasons to file a Chapter 13 case, see When to Consider Filing Under Chapter 13 Instead of Chapter 7.
Why Does the Bankruptcy Code Have an Automatic Stay?
The purpose of the automatic stay is to give all parties some breathing room to sort out what the bankruptcy proceeding can and cannot accomplish. It is designed to protect the debtor against actions that might affect him personally and those that might affect his property. This does not mean that a creditor no longer has a recourse for collection of its debt. It just means that the creditor can take only those actions allowed by the Bankruptcy Code or by a bankruptcy court.
Actions Prohibited by the Automatic Stay
The Bankruptcy Code prohibits most collection activity by creditors and collectors, including:
- Wage garnishments
- Utility disconnections
- Certain communications
Creditors must stop telephone demands and letter demands, including contact with your work, your family members, friends, and neighbors. Creditors must direct any communication to your attorney, your trustee or the court. If you filed the bankruptcy case pro se, meaning without using an attorney, the creditor is allowed to communicate directly with you for purposes of administering the bankruptcy case, but the creditor is still not allowed to make payment demands on you except what is allowed by the Bankruptcy Code or by a bankruptcy court.
What Is Allowed by the Automatic Stay?
The Bankruptcy Code does not prohibit every type of activity by a creditor. Certain actions by particular types of creditors can go forward, including:
- Certain Communications: Creditors can send statements with information about your accounts as long as they do not contain a demand for payment.
- Certain Tax Actions: These allowed actions include tax audits, issuing a tax deficiency notice, a demand for a tax return, a tax assessment, or a demand for payment of an assessment.
- Family Law Actions: These are lawsuits to establish paternity or to establish, modify, or collect child support or alimony.
- Criminal Proceedings: Criminal proceedings can go forward, but actions to collect certain fines or bad checks cannot.
- Loans From a Pension: If you borrow from your ERISA qualified pension, IRA or 401k account, your plan administrator is not required to stop drawing those payments from you or your income payments.
Unfortunately, sometimes a creditor will take an action that violates the stay. When that happens, the creditor may be subject to penalties, which can include paying damages to the debtor. For more on this, visit Your Rights When a Creditor Violates the Automatic Stay.
To take collection actions that would otherwise violate the stay, a creditor must ask the bankruptcy court to lift or modify the stay. To learn more, see Are You a Creditor? Don't Do This in a Bankruptcy Case.
The biggest downside of bankruptcy is the hit your credit report takes.
"You exchange not having that debt for having a bankruptcy on your report," said Ike Shulman, co-chair of the National Association of Consumer Bankruptcy Attorneys' legislative committee.
However, he said, many people who file for bankruptcy already have tarnished credit due to delinquent loans.
"People don't file bankruptcy because it's an easy decision to come to. It's because they don't have other choices."
-Ike Shulman, Co-chair of the National Association of Consumer Bankruptcy Attorneys' legislative committee