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The Protections Of The Automatic Stay In A Bankruptcy Proceeding

June 2011

Perhaps the most important and fundamental feature of a bankruptcy filing is the “automatic stay” which is immediately effective upon filing a bankruptcy petition.  The automatic stay is triggered whether the bankruptcy filer is an individual or a business and whether the bankruptcy petition is voluntary or involuntary.   While generally the stay does not operate to protect co-debtors of the bankruptcy debtor such as a guarantor, endorser or co-maker, in a Chapter 13 bankruptcy, the stay even acts to protect a co-debtor who is liable with the debtor on a particular consumer debt.  The stay is automatic because it arises simply from the fact that a bankruptcy petition is filed – there is no need for a court order.

The automatic stay generally becomes effective immediately upon the filing of the bankruptcy petition and operates to cease almost all collection efforts by creditors against the debtor, the debtor’s property, and any property that is deemed a part of the bankruptcy estate, and works to protect the debtor from further efforts by creditors related to collection until the debtor receives a discharge from bankruptcy or his case is dismissed. 

Examples of the types of prohibited creditors’ actions halted by the automatic stay include: 
  • Asset repossession 
  • Creating or perfecting liens
  • Foreclosures 
  • Seizing bank accounts 
  • Filing or continuing lawsuits against the debtor 
  • Garnishment or levies 
  • Setoffs against wages or security deposits 
  • Calls or other communications from creditors for the purpose of collecting a debt 
  • Reporting your debt to a credit reporting agency
  • Any other way of enforcing or collecting a debt
There are certain other actions which may proceed despite the automatic stay.  These actions include: 
  • Actions related to establishing paternity, spousal or child support or for the modification of an existing order
  • Actions to collect support from property that is not deemed to be property of the estate
  • Criminal proceedings against the debtor 
  • Tax audits, demands for tax returns or assessment of taxes (however, the right to actually collect the taxes is stayed during the bankruptcy) 
If a creditor violates the automatic stay there are serious penalties.  Typically any action taken by a creditor during the period of the stay will be void and have no legal effect.  In addition, creditors can be held liable by the court for damages related to violation of the stay. 

A creditor may ask the bankruptcy court for relief from the automatic stay in order to pursue the debtor outside of court to collect a specific debt.  In some cases relief will be granted, but many times the bankruptcy court will deny a creditor’s request for relief from stay in order to allow the bankruptcy debtor to proceed with the bankruptcy without the distraction and complications of outside proceedings. 

After a bankruptcy petition is filed, the automatic stay will remain in effect until one of four situations occur: (1) the bankruptcy judge grants a creditor relief from the stay; (2) the debtor is discharged from bankruptcy and/or a bankruptcy plan is confirmed; (3) the property at issue for the creditor is determined not to be property of the bankruptcy estate; or (4) the bankruptcy case is dismissed. 

Upon discharge of the debtor from bankruptcy, generally the debtor’s debts have been extinguished and the automatic stay is replaced by a permanent injunction and certain other protections prohibiting the creditor from seeking to collect the debt from the debtor in the future.  Further, in Chapter 13 cases (which typically remain open for three to five years after confirmation of the bankruptcy plan), the automatic stay will remain in place for the entire period. 

In light of the power of the automatic stay, a bankruptcy action may still be filed even if the debtor has been sued or collection efforts have begun against him or her.  Assuming the debts are dischargeable by the bankruptcy (there are some debts which are classified by law as being non-dischargeable such as child support or spousal support obligations), the debtor may eliminate the debt in light of a pending lawsuit or the creditor obtaining a judgment against the debtor.  In certain circumstances, liens placed onto a debtor’s property by creditors may even be removed.

If you believe that the protection of the automatic stay could provide you with relief against your creditors, it is necessary to have an experienced attorney guide you through the bankruptcy process. Contact Shein Law Group, PC online or at (559) 478-2980 to arrange a free initial consultation.
    
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