People who file for bankruptcy usually have numerous creditors clamoring to collect whatever assets might be left before another creditor can do so. After filing bankruptcy, the collection frenzy stops so the court can ensure that all creditors divide assets appropriately.
It’s the automatic stay that brings orderliness to the case. It’s automatically triggered when you file for bankruptcy and, once in place, prevents any one creditor from grabbing all available assets to the detriment of the others. The bankruptcy trustee (the court-appointed individual tasked with administering your action) can then find and disperse assets (if any) according to a priority ranking system.
The stay stops most common creditor collection actions, including:
- harassing debt collector calls
- threatening letters by collection agencies
- credit card and health care bill lawsuits, and
- car repossessions, home foreclosures, and wage garnishments.
If a creditor knowingly violates the stay, you can seek penalties. (Learn more by reading Can a Creditor Continue to Contact Me After I've Filed for Bankruptcy?)
The stay isn’t absolute, however. For instance, in some circumstances—such as when you’re behind on your house payment or your landlord wants to evict you—the creditor can file a motion with the bankruptcy court asking the judge to lift (remove) the automatic stay. If the creditor wins, it can proceed with foreclosure proceedings, take steps to remove you from your home, or whatever other action the order allows.
In other cases, the automatic stay doesn’t remain in effect throughout the entire bankruptcy, and once it terminates, the creditor can simply begin collection proceedings without seeking permission from the court. For instance, if you have a debt secured by personal property—such as your car—you can lose the property 45 days after the 341 meeting of creditors (the hearing all filers must attend) if you don’t follow the plan outlined in official Form 108 Statement of Intention for Individuals Filing Under Chapter 7. (You use the statement of intention form to tell the creditor whether you intend to keep or surrender the property). After the deadline passes, the bank can pick up your car (or other personal property) without bringing a motion to lift the stay.
Finally, if you’ve filed multiple bankruptcies within the same year, you should be aware that the automatic stay might remain in place for thirty days only, or might not go into effect at all. To find out, you should consult with an attorney.
(Be aware that the law surrounding the automatic stay is complicated and addressing all exceptions is beyond the scope of this article.)
Go to the main bankruptcy FAQ page.