The automatic stay is one of the main benefits of filing for bankruptcy. It provides the filer with immediate protection from their creditors, which means all collection calls have to stop, garnishments have to stop, and foreclosures can’t go forward. This article will discuss how the automatic stay works, how it fits in the greater picture of getting Chapter 7 bankruptcy relief, what can cause the automatic stay to end, and what to expect once that happens.
How It Works:
The automatic stay granted by the Bankruptcy Code is an important protection granted to everyone filing bankruptcy. The reason is it called “automatic” is that this protection begins precisely at the moment the case is filed. You can show the exact moment that the automatic stay begins based on the court’s time-stamp on your filed bankruptcy petition. Also, at the point of your bankruptcy filing, a notice is sent out to all of your creditors that you have filed a bankruptcy proceeding.
The notice is their signal to stop any collection efforts, whether that is collection calls, a garnishment, or a foreclosure proceeding. Sometimes there might be a slight lag between the official time-stamp and the collection activities actually stopping since creditors receive notice by mail, which is not immediate. If, however, a creditor continues to pursue collection after they have received notice of the bankruptcy filing (even if its notice in the form of you telling them about it), the bankruptcy court can and will sanction the creditor or debt collector.
The Automatic Stay as a Steppingstone on Your Way to Lasting Debt Relief
The automatic stay can be seen as the first step toward debt relief. It gives the filer some immediate relief before their discharge is entered. The order of discharge is the point near the end of a bankruptcy case when you’re officially absolved of your debts. In Chapter 7 bankruptcy, you’ll be able to walk away from all of your unsecured debts, like medical bills and any balance on your credit cards. This may or may not be your total debt, because certain debts, like child support, will survive a bankruptcy.
Part of the intention with a bankruptcy proceeding is to take any available assets from the filer and distribute those funds equally among all unsecured creditors. You’re still able to protect most (potentially all) of your personal possessions by using exemptions. If, however, you have more than a small amount of non-exempt equity in a personal property item (perhaps something that has more monetary value as a collector’s item) the Chapter 7 trustee can sell the property for the benefit of all unsecured creditors to share. If any single creditor were allowed to be aggressive in continuing to collect their own debt, that would leave less available to go to all the creditors overall.
Why does the automatic stay end when my discharge is entered?
The automatic stay is intended to provide immediate, but temporary relief. The automatic stay generally remains in place until the discharge is entered. Once that happens, you’re no longer responsible for the unsecured debts incurred before your Chapter 7 was filed. The protection and relief from creditors provided by the discharge is much stronger than the automatic stay and is permanent.
What is a motion for relief from the automatic stay?
A motion for relief from the automatic stay, also called a stay relief motion, is a request a creditor can submit to the bankruptcy court to ask for permission to take certain collection actions against the person who filed bankruptcy. Usually, you’ll see these motions filed by secured creditors. Secured creditors are those who hold a property interest securing your debt, like a mortgage on a house or a car loan. This property interest acts as security for the loan because if you are not making payments as agreed, the creditor can take back the property.
As we discussed above, filing for Chapter 7 allows you to walk away from your unsecured debts. Chapter 7 doesn’t, however, offer any permanent relief or repayment plan (like in a Chapter 13 bankruptcy) for a secured debt if you are behind. A creditor can file this motion to ask the court that they remove the protection of the automatic stay so they can resume collection efforts by taking back the property securing the debt.
So, if you file Chapter 7 when you are behind on your mortgage payments, it’s likely that your mortgage lender will file a motion like this to be able to resume foreclosure proceedings. In this scenario, the court will grant the request, because you are behind on that debt and the creditor is entitled to move forward. If, however, you are current on your mortgage payment at the time you file Chapter 7 and you don’t fall behind during the case, the creditor is unlikely to file a motion for relief from the automatic stay. And even if they did, the court likely wouldn’t grant a motion for relief filed by your mortgage creditor because they are not experiencing any harm.
The process
When a creditor files a motion for relief from the automatic stay in a bankruptcy, they will send a copy to the filer and their attorney after submitting it to the bankruptcy court. The filer has 14 days to respond to the motion. If no response is filed during that time period, the court will grant the motion by default, since there was no objection. A filer may well choose not to respond to a motion for relief if they are planning on surrendering the collateral as part of their bankruptcy filing.
If you decided to surrender your home in a bankruptcy, the creditor is able to resume foreclosure proceedings once the order has been granted. If, however, your intention is to keep your home and you believe you are current on your payments then you should respond within the objection period. The court will set a hearing date on the creditor’s motion so that both parties can present evidence supporting their position. Often the first hearing is mainly an opportunity for each side to state their case. The bankruptcy judge may ask for specific documentation to be submitted before a final hearing.
The stay has been lifted – now what?
Once they get a court order lifting the automatic stay, the creditor is allowed to move forward with the foreclosure or repossession of the property that secures the debt. The creditor does, however, still need to follow state law for their collection or eviction proceedings. At this point, it’s a good idea to contact the creditor directly to come up with a mutually agreeable surrender or move-out date. This helps any transfer move smoothly. You don’t need to be worried about being taken by surprise by your car disappearing or your house being locked unexpectedly. Instead, you have the chance to make a plan.
The additional benefit to surrendering secured property through your bankruptcy is that if there is any unsecured portion of the debt that you owe (such as late fees or penalties) those will be wiped out with the bankruptcy discharge. If you were to surrender secured property without bankruptcy protection you could be on the hook for any deficiency balance, which is really the worst of both worlds. You no longer have the property and you’re still paying on it. Now if for any reason there was extra money available after a foreclosure or repossession you might be entitled to all or a portion of the proceeds if your exemptions cover it.
When the automatic stay lifts automatically
As mentioned before, the automatic stay ends when the discharge is entered because it’s no longer necessary. There is another way for the automatic stay to end automatically and without the need for the creditor to file a motion with the court. It’s important to be aware of this so you’re not surprised when the creditor takes action.
Because of timing
There are some important dates to know in the bankruptcy process regarding the automatic stay. One of the forms that you file in your Chapter 7 case is called the “Statement of Intentions.” This is where you indicate whether you intend to surrender the property, redeem the property (pay off the value), or reaffirm the debt (voluntarily taking on an obligation you could otherwise walk away from in your bankruptcy, like continuing the make payments on a car loan or lease you want to keep.) Finally, you can state that you intend to retain the property which means you simply remain current on your payments or the creditor can repossess it.
You’ll need to carry out your stated intention within 30 days of the first scheduled date for your meeting of creditors, otherwise, the stay will lift automatically for that debt, and the creditor can proceed with collection efforts. Additionally, if you don’t carry out your intent by entering into a reaffirmation agreement or filing a motion to redeem the vehicle, the car can be legally repossessed 45 days after the first scheduled meeting date.
Because of a prior bankruptcy filing
The automatic stay can be impacted if you have filed any prior bankruptcies. If you’ve filed a bankruptcy case within the last year, the automatic stay will only be imposed for 30 days in your current case. If you want to retain the protection of the automatic stay for the period of your bankruptcy, you (or your bankruptcy lawyer) will need to file a “Motion to Extend the Automatic Stay,” within that time period to avoid risking any period of time where you are not protected.
If you’ve filed two or more bankruptcies within the last year, there will be no automatic stay and you (or your bankruptcy lawyer) will need to file a “Motion to Impose the Automatic Stay” as soon as you file your case. In either situation, it is a good idea to consult with a bankruptcy attorney for some professional help before filing a new case.
Conclusion
It’s important to understand the automatic stay, when and how it applies and how it impacts your property during the case. The automatic stay is a key benefit in any bankruptcy filing and is often a motivating factor for someone to file bankruptcy. It can offer a significant level of protection during your case to keep creditors off your back until your case has officially ended and you are able to move forward with a fresh financial start.
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