Bankruptcy Automatic Stay

The Power of Bankruptcy's Automatic Stay: After you File, the Law Offers Potent Legal Protection Against Bill Collectors.

When you file for bankruptcy, something called the automatic stay immediately stops any lawsuit filed against you and virtually all actions against your property by a creditor, collection agency or government entity. Especially if you are at risk of being evicted or foreclosed on, being found in contempt for failure to pay child support or losing such basic resources as utility services, welfare or unemployment benefits, your driver's license or your job (because of a raft of wage garnishments), the automatic stay may provide a powerful reason for filing for bankruptcy.

Here is how the automatic stay affects some common emergencies:

Utility disconnections. If you're behind on a utility bill and the company is threatening to disconnect your water, electric, gas or telephone service, the automatic stay will prevent the disconnection for at least 20 days. Bankruptcy will probably discharge the past due debts for utility service. Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff in January in New England might be justification enough.

Foreclosure. If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is usually a better remedy than Chapter 7 bankruptcy, if you want to keep your house.

Eviction. If you are being evicted from your home, the automatic stay can usually buy you a few days or a few weeks. But if the landlord asks the court to lift the stay and let the eviction proceed -- which landlords usually do -- the court will probably agree, reasoning that eviction won't affect the bankruptcy. Despite the attractiveness of even a temporary delay, it is seldom a good idea to file for bankruptcy solely because you're being evicted. You'll be better off looking for a new place to live or fighting the eviction in state court, if you have a defense.

Public benefit overpayments. If you receive public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks. The automatic stay prevents this collection; furthermore, the debt (the overpayment you owe) is dischargeable unless the agency convinces the court it resulted from fraud on your part. Whether or not the threatened collection of an overpayment justifies bankruptcy depends on how severely you'll be affected by the proposed reduction in benefits.

Loss of driver's license because of liability for damages. In some states, your driver's license may be suspended until you pay a court judgment for damages resulting from an automobile accident. The automatic stay can prevent this suspension if it hasn't already occurred. If you are absolutely dependent on your ability to drive for your livelihood and family support, keeping your driver's license can be a powerful reason to file for bankruptcy.

Multiple wage garnishments. Although no more than 25% of your wages may be taken to satisfy court judgments (up to 50% for child support and alimony), many people file for bankruptcy if more than one wage garnishment is threatened. For some people, any loss of income is devastating; also, some employers get angry at the expense and hassle of facilitating a succession of garnishments and take it out on their employees. Although federal law prohibits you from being fired for one garnishment, an employer can fire you for multiple garnishments. Filing for bankruptcy stops garnishments dead in their tracks. Not only will you take home a full salary, but you also may be able to discharge the debt in bankruptcy.

If the primary reason you are filing is to get the benefit of the automatic stay, you don't need to file all of your papers at once; you can file just the two-page petition and a mailing list of your creditors. If you don't file the rest of your papers within 15 days, however, the case will be dismissed.

Usually, the only way for a creditor to get around the automatic stay is to ask the bankruptcy court to remove ("lift") it if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, can't pay your mortgage arrears and have no way of keeping the property. The foreclosing creditor is apt to run to court soon after you file to ask for permission to proceed with the foreclosure -- and that permission is likely to be granted.
In a few instances, the automatic stay won't help you.

Certain Tax Proceedings. The automatic stay stops the IRS from issuing a tax lien or seizing property. However, the IRS can audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment or demand payment of such an assessment.

Support Actions. A lawsuit against you seeking to establish paternity or to establish, modify or collect child support or alimony isn't stopped by your filing for bankruptcy.

Administrative Freezes. If you file for bankruptcy owing money on a bank loan, and you also have a checking account with that bank, the automatic stay prohibits the bank from removing money from your checking account to cover what's owed. The bank can, however, freeze money in the checking account to cover the amount of your default -- at least until the bankruptcy court determines what will happen to the debt. Freezing money means that you have no access to it.

Criminal Proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component is not affected by the automatic stay. For example, if you were convicted of writing a bad check, sentenced to community service and ordered to pay a fine, your obligation to do community service won't be stopped by your filing for bankruptcy.

Evictions (California Only). A California law allows a landlord who has sued for eviction and won a judgment for possession (but not a money judgment for back rent) to let the marshal or sheriff evict even if you file for bankruptcy.

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