How Filing for Bankruptcy Protects You Immediately: The Automatic Stay
Filing for bankruptcy offers several benefits. While some of these benefits come at the end of the process, one important benefit comes immediately. This is the automatic stay. As one U.S. Bankruptcy Court explains:
“Immediately after a bankruptcy case is filed, an injunction (called the ‘Automatic Stay’) is generally imposed against certain creditors who want to start or continue taking action against a debtor or the debtor’s property.”
An injunction is a type of court-imposed remedy that prohibits the “enjoined” party from engaging in certain activities. In a bankruptcy case, the Automatic Stay prohibits creditors that are subject to the injunction from pursuing collection action against the debtor. Whether a creditor is already pursuing collection action or would otherwise have grounds to pursue collection in the future, once the Automatic Stay is in place, collection action is no longer allowed.
For many debtors, this can be crucial. When you are in debt and unable to pay what you owe, things can quickly go from bad to worse. This is especially true once a creditor sends your account to collections. Not only are you likely to start getting harassing phone calls, but your credit will suffer, and you will face an even steeper hill to climb on your way back to financial stability.
The availability of the Automatic Stay is one of the primary reasons not to wait if you are thinking about filing for bankruptcy. If you are struggling financially and concerned about facing collections (or are already dealing with collections), you should speak with a bankruptcy lawyer promptly. Your lawyer can help you decide if filing for bankruptcy is the right choice, and if so, your lawyer can help you quickly secure the protection of the Automatic Stay.
What You Need to Know About the Automatic Stay if You Are Considering Bankruptcy
While the Automatic Stay can provide immediate relief from collections, its protections are not absolute. The Automatic Stay does not apply to all types of debts, and creditors can seek relief from the Automatic Stay (or the right to pursue collection action) in certain circumstances. When considering bankruptcy, this is important to keep in mind—and you don’t want to file with the expectation of avoiding collection action only to find that your expectation was misguided.
Types of Debts Covered Under the Automatic Stay
So, what types of debts are covered under the Automatic Stay? Generally speaking, debts that are subject to the Automatic Stay in consumer bankruptcy cases include:
- Mortgage debt
- Rent debt
- Utility debt (the automatic stay will prevent disconnection for at least 20 days)
- Medical debt
- Credit card debt and other consumer debts
In other words, the Automatic Stay covers most types of debts that most people typically have when they are thinking about filing for bankruptcy. However, as we said, the Automatic Stay doesn’t apply to everything. If you have any of the following types of debts, the Automatic Stay won’t prevent your creditors from seeking payment once you file for bankruptcy:
- Federal tax debt
- Child support debt
- Alimony debt
- Pension and retirement account loan debt
- Criminal fines and penalties
These are just examples. Again, to make sure that filing for bankruptcy makes sense for your individual circumstances, you will want to speak with an attorney to go over your debts and explore all of the options you have available.
The Automatic Stay Doesn’t Mean You Don’t Have to Pay Your Bills
Another important factor to consider is that the automatic stay doesn’t mean that you don’t have to pay your bills. At this point, you are still in debt, and the bankruptcy process is far from over. Additionally, if you fall even further behind on your bill payments, this could limit the other remedies that are available to you through the bankruptcy process. As a result, even once you file for bankruptcy and the Automatic Stay is in place, you should still generally keep paying what you owe (if you can)—subject to any advice you may receive from your bankruptcy attorney.
Creditors Can Seek “Relief” from the Automatic Stay in Some Cases
Additionally, while the Automatic Stay goes into effect immediately, creditors can seek “relief” from the Automatic Stay in some cases. In other words, they can ask the court for approval to pursue collection action even though the Automatic Stay is in place.
As the American Bar Association (ABA) explains, “Relief from the stay may be granted by the court on its own motion or on request from a party in interest after notice and a hearing. . . . [and t]here are four grounds for obtaining relief from the Automatic Stay.” However, only three of these grounds are relevant in consumer bankruptcy cases. These grounds are:
- A secured creditor needs “adequate protection” against the diminution of the creditor’s collateral;
- The debtor does not have equity in the property and the property is not necessary for reorganizing the debtor’s debts; or,
- A secured creditor is seeking to pursue an action against real estate (i.e., eviction or foreclosure) and the debtor is engaging in a “scheme to delay, hinder, and defraud creditors.”
Should You File for Bankruptcy to Avoid Collections?
With all of this in mind, should you file for bankruptcy and obtain an Automatic Stay in order to avoid collections? Ultimately, the Automatic Stay is just one factor to consider when evaluating your options if you owe more than you can afford to pay. You also need to consider the other benefits of filing for bankruptcy (which are different under Chapter 7 and Chapter 13), and you will want to consider the potential benefits of pursuing various bankruptcy alternatives as well. An experienced bankruptcy attorney can help, and if you are dealing with financial stress, it is in your best interests to speak with an attorney as soon as possible.
Request a Free Consultation with Bankruptcy Attorney Georgette Miller in New Jersey
Do you need to know more about the benefits of filing for bankruptcy—including the Automatic Stay? If so, we invite you to get in touch. To request a free consultation with bankruptcy attorney Georgette Miller in New Jersey, please call 866-964-6529 or contact us online today.