One of the most significant benefits of filing for bankruptcy is a feature known as an "automatic stay." An automatic stay prevents creditors from collecting (or even trying to collect) on debts owed by the person declaring bankruptcy while the case is on-going.
If filing for bankruptcy is the financial strategy you have chosen for reorganizing your finances, you should learn how to make the most of the automatic stay feature.
Timeline and Exceptions
In most cases, the stay against creditor action goes into effect when someone files for bankruptcy, hence using the term “automatic” in an automatic stay. However, there are some reasons why a stay can be delayed or lifted:
- If there is no equity on the collateral property
- If the stay is not essential for reorganization
- If there is proof of bad faith or lack of adequate protective measure on the collateral
- If the court approves the creditor's motion for relief
- If there are other procedures that need to take place
- If the court determines someone is a serial bankruptcy filer.
If you have an outstanding balance on an asset, such as a house, but the home's value has dropped to below what you owe, there is no equity in the property. The creditor might be able to prove you haven't taken care of the home and caused the reduction in value.
If creditors can prove that you can reorganize your finances without a stay, the court can lift it. A bankruptcy court can also lift an automatic stay to allow another legal action to take place. For example, a court may lift a stay during divorce proceedings.
Serial bankruptcy filers are debtors who repeatedly file for bankruptcy over a short period. Unfortunately, there is no preset definition of what a short period is. The decision is made on a case-by-case basis, usually by a bankruptcy judge or trustee.
Make sure you maintain insurance coverage and file for bankruptcy at the right time to avoid losing total protection from the stay.
When a bankruptcy judge or trustee has deemed you a serial filer, it impacts your automatic stay timeline or cancels it altogether. Here are some common serial filer scenarios and how they affect automatic stays:
- Two cases in one year: If you have had one bankruptcy case pending during the previous year and then file a second one, the second case's stay will only last for 30 days, unless you successfully make your case for why the court should extend it.
- Three cases in one year: If you have had two bankruptcy cases pending during the previous year, the stay will not go into effect at all when you file the third case. To remedy that, you can file a motion, set a hearing, and try to convince the judge that filing three claims is reasonable for your specific situation. You'll need to demonstrate that you aren't trying to take advantage of your creditors or abuse the bankruptcy system.
- A joint filer who has filed individually: If you filed within the last year and the case was dismissed, if you file jointly within the same year, the automatic stay applies to the person you filed with, but not you.
For instance, suppose you were recently discharged from a Chapter 7 bankruptcy but immediately filed for Chapter 13 to protect your house and car. While within Chapter 13, you realize that you cannot keep up with the re-payment plan, so you allow your case to be dismissed and refile again soon after. You would be considered a serial bankruptcy filer because you had too many filings in a short time.
Automatic Stay Termination
The automatic stay's length also depends on whether it applies to collection activity against the debtor or against the debtor’s property.
If collection is against the debtor, the automatic stay generally lasts until the debtor receives a discharge. At that point, creditors can re-commence collection activity on debts that are not discharged. For debts that are discharged, a permanent discharge injunction takes the place of the temporary automatic stay.
Even when you file for bankruptcy, a lender is entitled to receive payment or take possession of the collateral. When you file a Chapter 7 bankruptcy case, among the many documents you provide is a Statement of Intention that tells the court and your creditors whether you will surrender the property, redeem the collateral, or reaffirm the debt.
If you file for bankruptcy on April 1 and continue charging on a credit card, the stay only covers debts incurred previous to the filing. You'd still be liable for the debts created after April 1.
Those who intend to keep the property need to either redeem or reaffirm within 30 days of filing the bankruptcy case. If you fail to file the statement on time, the stay automatically lifts the next day (31 days after the original bankruptcy filing). The creditor is then free to proceed with repossession or any other lawful collection activity against that collateral.
Creditor Stay Violations
If a creditor or collector continues collection efforts while you are under the protection of an automatic stay, it's a violation of bankruptcy law. Should a violation occur and be shown to injure a bankruptcy petitioner, the creditor or collector may have to pay compensatory damages, reimbursement of attorney's fees, or punitive damages.
Creditors sometimes infringe upon a stay—typically, it is because they were not aware that a bankruptcy petition had been filed.
Remember to consult with legal experts such as bankruptcy attorneys; filing for bankruptcy is a significant decision that impacts your finances, personal life, and your future.