People don’t want to file for bankruptcy. Often the decision to file for bankruptcy only occurs after a point is reached where something financially painful is about to happen. Wage garnishment. Foreclosure. Debt collection lawsuits. All of these things make your financial difficulties become a lot more real and difficult.
One of the most powerful tools contained within the Bankruptcy Code is the ability to stop creditors from attempting to collect on a debt. This means not only that creditors are not permitted to garnish wages, foreclose on your home, or even sue you. But it also means that creditors are not permitted to do more routine things like call you on the phone or send you collection letters.
Everything must stop.
When Does the Automatic Stay Start? (And what is so automatic about it)
The Automatic Stay comes into place the moment your bankruptcy case is filed with the bankruptcy court. As soon as you file your case the court automatically makes available to you for download a copy of the Order that stops all collection efforts against you.
It is important to note that you must actually file the case with the bankruptcy case before the Automatic Stay goes into place. Many times I meet with clients who believe that simply hiring a bankruptcy attorney and starting the process of putting the bankruptcy petition together will stop your creditors from activities like wage garnishment.
However hiring an attorney or even having the bankruptcy lawyer contact the creditor does not mean that the creditor is required to stop their collection efforts.
The case must be actually filed with the court and you must have a case number issued to you.
What Kind of Debts Does the Automatic Stay Apply to?
Unsecured Debts: Unsecured debts are those debts where there is not security or collateral attached to the loan. Secured debts like car loans or home loans have collateral in the form of a car or a house. On the other hand unsecured loans don’t have any property attached to the loan.
Here are a few of the most common debts and how the Automatic Stay impacts collection on these specific debts:
- Credit Card Debts: Credit card companies are not permitted to continue to call you or send you collection letters. Further, they cannot file debt collection lawsuits in an attempt to collect on the debt.
- Medical Bills: Like credit cards, medical providers are not permitted to continue to try and collect on the debt once your bankruptcy case has been filed. They also are not permitted to file suit.
- Personal Loans: Whether you obtain a personal loan from a bank or from an individual, all collects efforts must stop once the bankruptcy case has been filed.
- Business Loans: Business loans can get a little trick, including business credit cards. If the loan or credit card was taken out in the name of the business then your bankruptcy filing will not stop the creditor from trying to collect against the business. However, if you personally guaranteed the loan, then your bankruptcy filing will stop the creditor from trying to collect on the debt against you personally and your personal assets.
- Tax Debt: Even the IRS must abide by the power of the Automatic Stay. The IRS is not permitted to levy your bank accounts or garnish your wages while the Automatic Stay is in place. However, many times bankruptcy does not eliminate tax debt and you will need to make arrangements for payment after the bankruptcy is over or you run the risk that the IRS (or state taxing authority) will resume collection efforts against you.
- Student Loans: Student loans get special protections in bankruptcy in that loans taken out for an education purpose generally are not discharged in your bankruptcy case. However, student loan lenders must abide by the Automatic Stay as well and cannot continue to collect on the student loans while you have an active bankruptcy.
- Child Support: If there is a collection action pending against you for child support before your bankruptcy case is filed, then whether or not this collection action can continue largely depends on what chapter of bankruptcy you file. If you file for chapter 7 bankruptcy then the wages you make after your bankruptcy is filed are not part of your “bankruptcy estate” and thus can be garnished. However, if you file a chapter 13 bankruptcy the wages you earn after you file for bankruptcy are part of the “bankruptcy estate” and thus they would not be able to garnish wages.
Secured Debts: Secured debts are those debts that have property or collateral attached to them. The most common examples of secured loans are car loans and mortgage loans.
- Car Loans: The Automatic Stay will stop a secured creditor from repossesing your car, but only temporary. Even when you are in bankruptcy you will be required to keep your car payments current if you want to keep the car. If you stop making your car payments then the bank will be required to come into the bankruptcy court and obtain permission to repossess the vehicle before they can take any action.
- Home Loans: Mortgage loans are similar to car loans in that if you want to keep the house you must continue to make your monthly payment. If you don’t, eventually the bank will come in and request permission to start the foreclosure process. However, if you are facing foreclosure before your bankruptcy is filed, once you file your case they cannot foreclose and must seek permission through the court to do so.
- RV / ATV Loans: Loans on recreational vehicles and all-terrain vehicles are treated the same as car and mortgage loans. If you want to keep them, you must keep paying.
Will Bankruptcy Stop an Eviction Proceeding?
If you are renting a home or are a party to a lease agreement and are behind on the rent the automatic stay will stop you from being evicted and allow you to get caught up on the past due rent.
However, there are certain situations in which a bankruptcy will not stop an eviction proceeding, specifically if your landlord has obtained a judgment for possession prior to the filing of your bankruptcy case then the landlord can move forward with the eviction.
It is important to note that in Arizona this means that the landlord must have filed the eviction action with the court and must have received a judgment from the court. If this entire process is not complete then the Automatic Stay will stop the landlord from proceeding with the eviction.
Can Bankruptcy Stop My Utilities from Being Turned Off?
If you are behind on your power bill and are facing having it turned off bankruptcy can be a way to avoid having the lights turned off- at least for a little while. The Bankruptcy Code states that no utility may refuse or discontinue service within the first twenty (20) days of your bankruptcy case.
However, if you are behind on your bill the utility company can require that you put a security deposit down in order to continue to provide your service after the first twenty (20) days of your bankruptcy.