From the second the court clerk stamps your bankruptcy petition as “filed,” you are protected from debt collection efforts by the automatic stay. The automatic stay is a powerful weapon against creditors that debtors can use a shield, protecting them from all collection activities. The automatic stay can stop a lawsuit, stop a foreclosure sale, stop an eviction, or stop the government from ending benefits like food stamps or welfare benefits. But what is this tool and how does it work?
The automatic stay is created by Section 362 of the Bankruptcy Code. That section of the law says that a bankruptcy petition prohibits anyone from starting or continuing a lawsuit against the debtor, attempting to take the debtor’s money or property, or enforcing any liens against the debtor’s property. In general, the automatic stay stops every creditor, debt collector, and government agency from taking negative action against you or attempting to collect a debt.
The point of a bankruptcy case is to allow a debtor to either discharge or reorganize his or her debt. It is difficult to start over if collections actions never stop and the debtor is in constant fear of eviction or repossession. The automatic stay provides a final measuring point for all of the debtor’s debt—from the moment the bankruptcy petition is filed, collections actions stop and all creditors must value their claims as of the date of the bankruptcy.
For example, suppose a person owes $10,000 to a creditor and cannot pay it. The creditor may have to hire an attorney or a debt collection company to collect the money owed. The debt may also collect interest. By the time six months of collection efforts have passed, the creditor may be owed much more than the original debt. These costs will continue to grow up until the moment the debtor files for bankruptcy. At that time, the automatic stay is in place and the creditor can no longer take any collection action against the debt. Additionally, the creditor will only be able to make a claim for the amount it is owed as of the date of the bankruptcy—the debt cannot continue to incur costs or interest.
During the bankruptcy case, the debtor will decide how to deal with each creditor’s claim. The creditor may receive some, all, or none of the money that it is owed, depending on the type of debt and the type of bankruptcy case. Even if the creditor is not paid in full, it will not be able to pursue the debtor for the rest of the money owed if the debtor successfully completes the bankruptcy case.
The automatic stay can remain in place as long as the debtor is in bankruptcy. This means that the debtor may get a break from collection actions for anywhere between three months and five years, depending on if he or she files a Chapter 7 or a Chapter 13 case.
However, the automatic stay is not necessarily permanent or unbreakable. First, certain types of actions are not subject to the automatic stay. The automatic stay will not stop criminal proceedings, child support or paternity proceedings, tax audits, or actions against certain cosigners or co-debtors. Additionally, secured creditors can ask a judge to lift the automatic stay and allow them to resume collection efforts.
In order to lift the automatic stay, the creditor must be able to show that the bankruptcy case does not protect its interests in a certain piece of property. The creditor must also show that it has cause for relief and the property is not necessary to the bankruptcy plan. For instance, it is common for mortgage lenders to ask a judge to lift the stay if the debtor has no means or ability to make a monthly mortgage payment.
This means that while a bankruptcy case can be a very effective way to stop a foreclosure case, the debtor must still have a plan to get the mortgage back on track. A stay may provide the debtor with enough time to work out a mortgage modification, collect money to pay off arrearages, or negotiate a Chapter 13 repayment plan, but it will not absolve the debtor from his or her responsibility to pay the debt forever. If the debtor cannot pay the mortgage even with a bankruptcy, the mortgage lender will likely be granted relief from the automatic stay.At Loan Lawyers, our experienced South Florida bankruptcy and foreclosure attorneys know how to use the federal bankruptcy protections provided to debtors to your advantage. If you need help saving your home from foreclosure, we can create a plan that gives you the best chance at success. To schedule a free consultation and learn more about your legal rights and options, contact our office today by calling (888) FIGHT-13 (344-4813).