When you file for Chapter 7 or Chapter 13 bankruptcy, the automatic stay immediately goes into effect. The automatic stay prohibits most creditors from continuing with collection activities, which can provide welcome relief to debtors as well the opportunity to regroup during bankruptcy. There are some exceptions to the automatic stay, so it’s important to learn about these before you file. And creditors can ask the bankruptcy court to lift (remove) the stay. In certain circumstances, the court is likely to do so. When you file for bankruptcy, a court order called the automatic stay immediately stops most civil lawsuits filed against you and most collection actions being taken against your property by a creditor, collection agency, or government entity. The automatic stay may provide a compelling reason to file for bankruptcy. Bankruptcy can temporarily and sometimes permanently help if you’re at risk of being evicted, being foreclosed on, or losing such essential resources as utility services or a portion of your paycheck through wage garnishment.
Here’s how the automatic stay affects some common emergencies:
• Utility disconnections: If you’re behind on a utility bill and the company is threatening to disconnect your water, electric, gas, or telephone service, the automatic stay will prevent the disconnection for at least 20 days. Although the amount of a utility bill itself rarely justifies a bankruptcy filing, it might make sense to file if you have other debt that you can discharge. Be aware that the utility company will likely be able to require that you pay a deposit to ensure future payment.
• Foreclosure: If your home is being foreclosed on, the automatic stay will stop the proceedings. What will happen next, however, will depend on the bankruptcy chapter that you file. For instance, if you want to keep your home, Chapter 13 bankruptcy is usually a better remedy because you can catch up back payments in a three- to five-year repayment plan. By contrast, Chapter 7 bankruptcy doesn’t have a mechanism that will allow you to retain your home if you’re behind, so the relief provided by the stay will be temporary.
• Eviction: If you’re being evicted from your home, the automatic stay might provide some help, but it’s usually temporary. If your landlord already has a judgment of possession against you when you file, the automatic stay won’t affect these eviction proceedings; the landlord can continue just as if you hadn’t filed for bankruptcy. And if the landlord alleges that you’ve been endangering the property or using controlled substances there, the automatic stay won’t do you much good, either. In other cases, the automatic stay might buy you a few days or weeks, but the landlord will probably ask the court to lift the stay and allow the eviction and the court will probably agree to do so.
• Collection of overpayment of public benefits: If you receive public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks, or, if you no longer receive benefits, from you directly. The automatic stay prevents this collection. However, if you become ineligible for benefits, the automatic stay doesn’t prevent the agency from denying or terminating benefits for that reason.
• Multiple wage garnishments: Filing for bankruptcy stops most garnishments dead in their tracks. Not only will you take home a full salary, but you also will be able to discharge qualifying debt such as credit card balances and personal loans in bankruptcy. Be aware that commonly garnished debts, such as for ongoing child support and alimony, won’t get discharged.
What the Automatic Stay Cannot Prevent
In a few instances, the automatic stay won’t help you.
• Certain tax proceedings: The IRS can still audit you, issue a tax deficiency notice, and demand a tax return (which often leads to an audit), issue a tax assessment, or demand payment of such an assessment. However, the automatic stay does temporarily stop the IRS from issuing a tax lien or seizing your property or income. Whether you’ll be responsible for the tax after your bankruptcy will depend on whether the tax gets discharged in Chapter 7 bankruptcy or whether you pay the debt in Chapter 13 bankruptcy.
• Support actions: A lawsuit against you seeking to establish paternity or to establish modifies, or collect child support or alimony isn’t stopped by your filing for bankruptcy.
• Criminal proceedings: A criminal proceeding won’t be stopped by the automatic stay. For instance, if you were convicted of writing a bad check, sentenced to community service, and ordered to pay a fine, your obligation to do community service won’t be stopped by your filing for bankruptcy and if the fine was assessed as a punishment, you’ll be required to pay it, as well.
• Loans from a pension: Despite the automatic stay, money can be withheld from your income to repay a loan from certain types of pensions (including most job-related pensions and IRAs).
• Multiple filings: If you had a bankruptcy case pending during the previous year, then the stay will automatically terminate after 30 days unless you, the trustee, the U.S. Trustee, or a creditor asks for the stay to continue and proves that the current case was filed in good faith. If a creditor had a motion to lift the stay pending during the previous case, the court will presume that you acted in bad faith, and you’ll have to overcome this presumption to get the protection of the stay in your current case.
Filing a Motion to Lift the Automatic Stay
Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove (“lift”) the stay. To avoid fines and penalties, the creditor must file a motion asking for permission to continue with collection efforts.
Motions to lift the automatic stay commonly involve the following:
• a foreclosure action
• a landlord/tenant dispute, or
• a lawsuit in another court.
The bankruptcy court won’t rubber stamp the creditor’s request, however. The creditor must show that keeping the automatic stay in place will cause the creditor to lose money and provide no financial benefit or harm to other creditors. For instance, suppose that you file for bankruptcy the day before your house is to be sold in foreclosure and the facts are as follows:
• You don’t have any equity in the house.
• You can’t catch up and pay your mortgage arrears.
The foreclosing creditor is apt to go to court soon after you file for bankruptcy and ask for permission to proceed with the foreclosure. The basis for the motion will be that when taking out the mortgage, you put up a home as collateral, thereby giving the lender a lien that allows it to recover the home through foreclosure if you, the borrower, default on the agreement, such as by failing to make timely payments. With this type of debt known as a secured debt the house guarantees payment and in most cases, gives the lender the right to the house above all other creditors. After the creditor files the motion, the debtor (or potentially, any other party with interest in the matter) can oppose the motion at a hearing in front of a judge. If the creditor makes its case, the judge will grant the request and allow the lender to move forward.
In the example above, the court will likely grant the request because:
• You have no way of keeping the property.
• There isn’t any equity in the property that can be used to pay other creditors.
• The lien on the property gives the lender the right to recover the home, sell it at auction, and use the proceeds to pay toward the outstanding mortgage.
• The longer the bankruptcy court prevents the lender from exercising the lien rights, the more money the creditor will stand to lose with no gain to any other creditor.
By contrast, if there was enough equity in the house to pay for future payments owed to the lender sometimes called an “equity cushion” then the creditor would not stand to lose money, and the court might deny the motion. But a creditor might file a motion to lift the automatic stay for another reason, too. For instance, suppose that a creditor who was suing the debtor in another court at the time of the bankruptcy filing such as a state court asks the bankruptcy court for permission to continue pursuing the lawsuit in that forum. If the creditor can show that the trial outcome (judgment) will be non-dischargeable (will survive the bankruptcy) or doesn’t involve a matter normally resolved in bankruptcy court (such as an enforcement action) and the outcome won’t affect the rights of other creditors, the court will likely grant the motion especially if the trial has been ongoing for some time. An example would be an enforcement case brought by a government entity to enforce an antipollution statute. Because litigation can be complicated, if you find yourself defending a motion to lift the automatic stay, you should seek advice from an attorney as soon as possible. One of the most significant benefits of filing for bankruptcy is a feature known as an “automatic stay.” An automatic stay is an injunction against creditor actions during a bankruptcy case. In other words, it prevents creditors from collecting (or even trying to collect) on debts owed by the person or entity which has filed for bankruptcy. If filing for bankruptcy is the financial strategy that you have chosen to reorganize your finances, then you must learn how to make the most of the automatic stay feature while avoiding potential pitfalls. In most cases, the stay against creditor action goes into effect the moment someone files any type of bankruptcy case, hence the “automatic” in “automatic stay.” However, there are some reasons why a stay can be delayed or not go into effect at all. Although rare, a bankruptcy court has the power to lift an automatic stay. For example, a court may lift a stay during divorce proceedings or to allow for foreclosures on underwater properties.
Exceptions to the Rule: Serial Filings
Serial bankruptcy filers are debtors who repeatedly file for bankruptcy over a short period of time. Unfortunately, there is no preset determination of what “a short period of time” is. The decision is made on a case-by-case basis, usually by a bankruptcy judge or trustee. For example, let’s say you were recently discharged from a Chapter 7 bankruptcy, but to protect your house or car, you immediately file for Chapter 13. While within the Chapter 13, you realize that you are unable to keep up with the re-payment plan, so you allow your case to be dismissed and refile again soon after. This is an example of a serial filer.
When a bankruptcy judge or trustee has deemed you a serial filer, this can impact the timeline of your automatic stay, or cancel it altogether. Here are a couple of common serial filer scenarios and how they impact 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 cases 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. The length of the automatic stay depends on whether it applies to collection activity against the debtor or against the debtor’s property.
If a creditor or collector continues collection efforts while you are under the protection of an automatic stay, that’s a violation of bankruptcy law, and you can stop it. Should this violation take place, and if it’s shown to injure a bankruptcy petitioner, the creditor or collector may have to pay compensatory damages, reimbursement of attorney’s fees, or punitive damages. In most cases, when a creditor infringes upon a stay, it is typically due to the timing of when a case was filed. The creditor may not be aware that a bankruptcy petition has been filed.
Differences in Chapter 7 v. Chapter 13 Bankruptcy and Foreclosure
The type of bankruptcy filed will determine whether the foreclosure will just be postponed or whether you will be using bankruptcy to pay back arrearages and keep your home.
Chapter 7 bankruptcy will stop foreclosure on your home; however, since Chapter 7 bankruptcy does not have a plan of reorganization, then Chapter 7 is only a temporary solution to stopping foreclosure. Once the foreclosing mortgage company requests the automatic stay be lifted or the bankruptcy case is discharged, then the mortgage company may begin the foreclosure process where they left off. However, this does not mean a Chapter 7 cannot help you keep your home. By eliminating expensive debts, such as credit cards or high monthly auto loan payments, then you may be able to afford to pay your mortgage. After you file Chapter 7, you would want to begin discussing your options for modifying your mortgage with your lender in order to save your home.
In the alternative, if you file a Chapter 13 bankruptcy, then you do not need to have a separate agreement with the mortgage company to keep your home. The bankruptcy will stop your foreclosure, allow you to reorganize expensive debt, begin making regular payment after your case is filed, and permit you to catch up on arrearages over 3-5 years. In addition, in Chapter 13 bankruptcy you can remove second or higher mortgages and liens placed on your home as long as the value of the home is equal to or less than the amount you owe on the first mortgage. Bankruptcy attorneys call this lien stripping. It can save you thousands of dollars and help you afford to keep your home.
Exceptions to Automatic Stay Stopping a Lawsuit
Your lawsuit will be stopped by your bankruptcy attorney after the filing of your case. Once the case is filed, the bankruptcy court will send an official letter to the attorneys or creditor handling the lawsuit. In addition, if there is a court date that needs to be stopped quickly, then your bankruptcy attorney can immediately put the creditor on notice of your filing and in most cases stop you from having to appear in court. There are few exceptions to the automatic stay stopping a lawsuit. However, they are worth mentioning in case they apply to your situation. Here are some common examples of legal proceedings the automatic stay will not stop:
• criminal legal proceeding
• establishment of paternity
• legal proceeding for child support or spousal support
• child custody or visitation proceedings
• divorce except to the extent the divorce is determining the division of property
• proceeding in regards to domestic violence
• suspension or restriction of a driver’s license, recreational license, or professional license.
When you need legal help with a writ of garnishment, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506