How Bankruptcy Stops Your Creditors: The Automatic Stay

The automatic stay in bankruptcy works by stopping most creditors in their tracks. Once you file your bankruptcy case, the court sends your creditors a notice advising them of the automatic stay and that collection calls, letters, wage garnishments, debt collection lawsuits, and other collection activities must cease.

Learn which creditors bankruptcy's automatic stay will stop and when a creditor might ask the court to lift the stay to allow a foreclosure, repossession, or another collection action to resume.

What Is the Automatic Stay?

An "automatic stay" court order immediately stops many lawsuits and other collection actions when you file for bankruptcy, including those filed by a creditor or debt collection agency. It also stops creditors from repossessing your car or seizing other property.

The automatic stay also stops eviction, foreclosure, a loss of utility services, and wage garnishment. Whether the bankruptcy filing will permanently solve your problem will depend on the issue and whether you file for Chapter 7 or 13.

What Bankruptcy's Automatic Stay Can Prevent (at Least Temporarily)

Here's how the automatic stay affects some common emergencies.

How Bankruptcy's Automatic Stay Can Stop Foreclosure

The automatic stay will stop the proceedings if your lender is foreclosing on your home. However, what happens next will depend on the bankruptcy chapter you file. For instance, if you want to keep your home, Chapter 13 bankruptcy is usually a better remedy because you can catch up on back payments in a three- to five-year Chapter 13 plan.

By contrast, Chapter 7 bankruptcy doesn't have a mechanism that will allow you to retain your home if you're behind, so the relief provided by the stay will be temporary. Learn more about how bankruptcy's automatic stay stops foreclosure.

Using the Automatic Stay to Stop Evictions Temporarily

If you're being evicted from your home, the automatic stay might help, but it's usually temporary. If your landlord already has a judgment of possession against you when you file, the automatic stay won't affect the eviction proceedings. The landlord can continue just as if you hadn't filed for bankruptcy.

Also, if the landlord alleges that you've been endangering the property or using controlled substances there, the automatic stay won't do you much good, either. Learn more about evictions and the automatic stay during bankruptcy.

Erasing Public Benefit Overpayment Collections With Bankruptcy

If you were overpaid public benefits, usually the agency is entitled to collect the overpayment out of your future checks or, if you no longer receive benefits, from you directly. The automatic stay prevents this collection and, unless you committed fraud, you can erase the overpayment in bankruptcy.

Filing for Bankruptcy to Avoid Wage Garnishments

Filing for bankruptcy stops most garnishments dead in their tracks. Not only will you take home a full salary, but you also will be able to discharge qualifying debt, such as credit card balances and personal loans.

A payment for ongoing child support and alimony won't be stopped or discharged. What will happen to overdue support payments and back taxes will depend on the bankruptcy chapter that you file. You'll likely remain responsible after a Chapter 7 bankruptcy and pay off the debt entirely in a Chapter 13 bankruptcy.

Stopping Utility Shut Offs Temporarily

If you're behind on a utility bill and the company threatens to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent the disconnection for at least 20 days. Although the utility bill amount itself rarely justifies a bankruptcy filing, it might make sense to file if you have other debt you can discharge. Be aware that the utility company will likely be able to require that you pay a deposit to ensure future payment.

Find out which debts you can erase in Chapter 7 bankruptcy and what you can eliminate in Chapter 13.

What the Automatic Stay in Bankruptcy Can't Prevent

In a few instances, the automatic stay won't help you.

Certain tax proceedings. The IRS can still audit you, issue a tax deficiency notice, demand a tax return, issue a tax assessment, or demand payment of such an assessment. However, the automatic stay temporarily stops the IRS from issuing a tax lien or seizing your property or income.

Whether you'll be responsible for the tax after your bankruptcy depends on whether the tax gets discharged in Chapter 7 bankruptcy or whether you pay the debt in Chapter 13 bankruptcy. Learn more about whether bankruptcy stops the IRS from collecting tax debts.

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.

Criminal proceedings. The automatic stay won't stop a criminal proceeding. For instance, 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. If the fine was assessed as a punishment, you'll also be required to pay it, as

Loans from a pension. Despite the automatic stay, your employer can withhold money from your income to repay a loan from certain pensions, including most job-related pensions and IRAs.

How Long Does Bankruptcy's Automatic Stay Stop Creditors?

In most cases, the automatic stay will protect you for the duration of your Chapter 7 case. In Chapter 13, the automatic stay lasts until the court "confirms" or approves the Chapter 13 repayment plan. Once confirmed, your creditors must abide by the payment terms in the plan as long as you continue to make timely payments.

However, exceptions exist. If you filed for bankruptcy during the previous year, the stay would last 30 days. If you filed for bankruptcy twice during the previous year, the bankruptcy court wouldn't put the automatic stay in place.

In both cases, you can file a motion with the bankruptcy court asking the court for automatic stay protection. However, if a creditor filed a motion to lift the stay during the previous case, the court will presume that you acted in bad faith. You'll have to overcome this presumption to get the protection of the stay in your current case.

Learn more about multiple bankruptcy filings and losing the automatic stay for repeat filings.

Creditors Can Resume Collections After Filing a Motion to Lift the Automatic Stay

Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove or "lift" the stay. To avoid fines and penalties, the creditor must file a motion asking for permission to continue with collection efforts.

Motions to lift the automatic stay commonly involve the following:

• a foreclosure action
• a landlord/tenant dispute, or
• a lawsuit in another court.

The bankruptcy court won't approve the creditor's request unless the creditor shows that keeping the automatic stay in place will cause the creditor to lose money and provide no financial benefit or harm to other creditors. That said, most are granted.

For instance, suppose that you file for bankruptcy the day before your house is to be sold in foreclosure, and you don't have any equity in the house and can't catch up and pay your mortgage arrears. The court will likely grant the motion.

How Long You'll Have Before a Creditor Files a Motion to Lift the Automatic Stay

The foreclosing creditor will likely file a motion soon after you file for bankruptcy and ask for permission to proceed with the foreclosure. The basis for the motion will be that when taking out the mortgage, you put up a home as collateral. The lien allows the lender to recover the home through foreclosure if you, the borrower, defaults on the agreement, such as by failing to make timely payments.

With this type of debt—known as a "secured debt"—the house guarantees payment. In most cases, the lien gives the lender the right to the house above all other creditors.

Defending Against a Motion to Lift the Automatic Stay

After the creditor files the motion, the debtor or trustee can oppose the motion at a hearing before a judge. The trustee will oppose it and likely win if you can't protect all the home equity with a bankruptcy exemption and the trustee wants to sell the home and use the proceeds to pay other creditors.

If the creditor makes its case, the judge will grant the request and allow the lender to proceed. In the example above, the court will likely grant the request because:

• You have no way of keeping the property.
• There isn't any equity in the property that the trustee can use to pay other creditors.
• The lien on the property gives the lender the right to recover the home, sell it at auction, and use the proceeds to pay toward the outstanding mortgage.
• The longer the bankruptcy court prevents the lender from exercising the lien rights, the more money the creditor will stand to lose—with no gain to any other creditor.

If the house had enough equity to pay for future payments owed to the lender—sometimes called an "equity cushion"—then the creditor would not stand to lose money, and the court might deny the motion. The problem is that you would lose the house after bankruptcy if you couldn't bring it current.

Other Reasons a Creditor Might File a Motion to Lift the Automatic Stay

If a creditor sued the debtor in another court at the time of the bankruptcy filing, such as a state court, the creditor might ask the bankruptcy court for permission to continue pursuing the lawsuit in that forum. The bankruptcy court will grant the motion if the lawsuit doesn't involve a potential creditor. An example would be an enforcement case brought by a government entity to enforce an antipollution statute.

The bankruptcy court would also grant the motion if the trial has been ongoing for some time and the issue needs to be resolved to determine whether a debt should be discharged. This situation is common when someone has accused the filer of fraud. Instead of making the litigants begin again, the bankruptcy court will adopt the state court outcome.

You'll find a detailed discussion in When a Creditor Tries to Lift (Remove) the Automatic Stay.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true—and we wholeheartedly encourage research and learning. You'll find many more helpful bankruptcy articles on Nolo's bankruptcy homepage, and information needed to complete the official downloadable bankruptcy forms is located on the Department of Justice U.S. Trustee Program.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.