If you feel overwhelmed by debt, know that there are always options. One course of action to consider is a Chapter 7 bankruptcy. There are many benefits to this legal process, including what is known as the automatic stay. The stay effectively stops most collection actions and lawsuits against you.
However, keep in mind that there are certain actions that will not be paused by the stay. Further, creditors do have the option of asking the court to “lift” the stay, which allows a collection activity or lawsuit to move forward during the bankruptcy.
How Does the Automatic Stay Work?
Now, in a Chapter 7 bankruptcy, the stay happens automatically. This means that you don’t need to file anything additional with the court. Once your case has been initiated, a notice will be sent to all of your creditors letting them know that you filed for bankruptcy and that they are prohibited from taking certain actions regarding your debt.
Specifically, the actions that a creditor can’t take include:
- Filing a lawsuit or continuing an existing lawsuit
- Recording liens against your property
- Reporting debt to a credit bureau
- Seizing property or income
- Turning off utilities
- Initiating foreclosure proceedings
Evictions are also not allowed, provided your landlord hasn’t already been issued what is known as a judgment for possession. In other words, if the eviction is merely pending or has not been filed, the landlord can’t move forward with it.
When the Automatic Stay Doesn’t Apply
Keep in mind that the stay will not apply to any divorce or child support proceedings. Those types of cases will not be affected by your bankruptcy and will continue normally. The stay will also not impact certain tax issues, such as a tax audit or tax assessment.
Also, it’s important to note that the bankruptcy code has certain safeguards in place to prevent someone from filing and withdrawing a case to take advantage of the automatic stay.
With that in mind, if you had a bankruptcy dismissed within the last year, your automatic stay will only last for 30 days. However, you can request an extension from the court. But, no stay will be issued if you had at least two bankruptcies dismissed in the past year. In this case, upon request, the court may be willing to order the stay if you can prove that you did not act in bad faith.
Motion to Lift the Automatic Stay
As mentioned, your creditors have the option to file a motion to “lift” an automatic stay. If successful, the court will issue an order that cancels the stay. This will allow a collection or lawsuit to continue during the bankruptcy.
This is common in foreclosure actions, landlord/tenant disputes, and civil lawsuits (such as a personal injury case). However, you are entitled to notice and will have an opportunity to explain why the stay should not be lifted. Due to the importance of this court decision, it’s always best to have an attorney handle the matter.
How Long Does the Automatic Stay Remain in Effect?
Once a stay has taken effect, it lasts until one of the following events occur:
- The bankruptcy judge lifts stay (as discussed above)
- You receive a discharge of your debt (typically takes between 4-6 months from the date of filing for Chapter 7)
- Your case is closed
- The property is no longer property of the “estate” (meaning you no longer have ownership of it)
Now, keep in mind that once a debt is discharged, a creditor is prohibited from engaging in any collection actions associated with the debt. However, collection activities can resume on debts that have not been discharged.