What Is an Automatic Stay?

Filing for bankruptcy may or may not offer all consumers the clearest path out of debt but one benefit might just feel like the arrival of the cavalry.

Filing for bankruptcy triggers the “automatic stay” injunction that is a provision of U.S. bankruptcy law.

The automatic stay temporarily stops harassing phone calls, ugly letters and the threat of lawsuits. In addition, it holds informed debt collectors liable should they violate the injunction.

If that doesn’t exactly qualify as debt forgiveness, it can definitely feel like relief to debtors facing such devastating consequences as foreclosure and wage garnishment.

Simply put, an automatic stay is a provision in U.S. bankruptcy law that temporarily prevents creditors, collection agencies, government entities and others from pursuing debtors for money owed.

How Does an Automatic Stay Work?

It’s not called “automatic” by chance. The stay goes into effect per Section 362 of the U.S. Bankruptcy Code as soon as an individual or business files for bankruptcy. Chapter 7 and Chapter 13 – which account for 99.9% of common bankruptcy filings — allow for automatic stays.

Automatic stays are not one-size-fits-all debt relief. They have their limitations. but an automatic stay can provide the respite that allows debtors to work out their finances before creditors can attempt to collect on a debt.

An automatic stay can serve the interests of creditors as well as debtors. How so? It puts all creditors on a level playing field. Once an automatic stay is in place, no one creditor can attempt to collect on a debt to the detriment of other creditors.

Be sure to list all creditors in your bankruptcy filing so they are informed that the process (and automatic stay) is in effect.

Keep a copy of the bankruptcy filing case number handy should some creditors fail to receive notice of your filing and continue trying to contact you.

An automatic stay isn’t permanent. But it protects debtors from further court action, foreclosure, liens against property and repossession attempts while the bankruptcy filing is playing out in court.

What an Automatic Stay Can Prevent

An automatic stay is a tool with obvious benefits to debtors who file Chapter 7 and Chapter 13. But it’s not a do-everything Swiss Army knife.

Here are some of the areas it can help, but remember, the help is temporary.

• Foreclosure – An automatic stay will keep foreclosure proceedings on hold for as long as your bankruptcy case is open.
• Eviction – Stays can be helpful for tenants but the relief is not as open-ended as it is with foreclosure. The relief from eviction can last for a brief period but the landlord can request the stay be lifted while the bankruptcy filing is still active.
• Utility disconnections – An automatic stay won’t erase what you owe in unpaid utility bills, but it can keep your utilities from getting shut off for at least 20 days.
• Collection of overpaid public benefits – If you were overpaid for any benefits – Medicare, unemployment (Covid19 benefits come to mind) – an automatic stay prevents creditors from garnishing the overpayment. Note: It does not stop the agency providing the benefits from stopping payment to you.
• Multiple wage garnishment — A stay can protect you from having your wages garnished. If the debt that prompted your wage garnishment is wiped out in bankruptcy, filing for bankruptcy could stop the garnishment permanently.

What an Automatic Stay Can’t Prevent

An automatic stay has limitations as well as benefits. While it helps on some fronts, it doesn’t provide protection from all debts or legal actions.

• Criminal proceedings: If you were charged with a crime and a penalty is part of the charge, an automatic stay will not help you avoid paying the penalty. Don’t bother arguing this one. The Supreme Court ruled bankruptcy laws should not be used to shield creditors from criminal proceedings.
• Support actions: Likewise, don’t think about stopping child support payments upon filing for bankruptcy. The automatic stay won’t stop child support from accruing or delay family law proceedings. Child support debt is among the first debts to get paid.
• Pension loans: While an automatic stay can protect a debtor against wage garnishment, employers can continue to deduct pension loan payments through the garnishment. With job-related pensions and IRAs, money can be withheld from your income to pay loans.
• Multiple filings: The past is not really past. Multiple bankruptcy filings in a year’s time might smell like a manipulation of the bankruptcy system.  You’ll have to prove your repeat filing is legitimate.

If you had a bankruptcy filing the previous year, 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.

How Long Does an Automatic Stay Last?

The automatic stay remains in effect until your case is closed. But, of course, it isn’t always that simple.

For Chapter 7, it’s often the case that a stay will last the 3-5 months the court case is open. For Chapter 13, bankruptcy cases could take anywhere from 3-5 years.

Again, multiple filings can also affect the length of an automatic stay. More than one bankruptcy filing in a calendar year could limit the stay to 30 days. A history of bankruptcy filings could completely eliminate an automatic stay from consideration.

So can a motion to lift the stay (if granted.) Creditors can file a motion to remove the stay before the bankruptcy case is closed if they can prove the stay hurts their business (a loss of money) or prove the likelihood that the assets will no longer be worth enough to cover costs after the bankruptcy case is complete.

If the court agrees, it may grant their request but it’s a creditor-by-creditor decision, and not all courts approve lifting an automatic stay.

Some instances that could lead to a stay being lifted include a landlord-tenant dispute, a foreclosure action or a lawsuit in another court.

What to Do If a Creditor Violates the Automatic Stay

A creditor violating the automatic stay could face penalties from the court, provided the debtor files the proper paperwork to sue the creditor.

Obviously, creditors have incentives to honor the automatic stay. But they must have received notice of the bankruptcy filing to stop collection efforts.

The bankruptcy court mails notice of the filing to the addresses listed on your bankruptcy forms. If you leave a creditor out, the courts could, too. Even if you don’t, it could take a few weeks for a large company to process the notice of Chapter 7.

It’s smart to keep a copy of the paperwork, complete with case number of the filing, should an uninformed creditor continue to call.

Help with Chapter 7 or Chapter 13 Bankruptcy

Filing for bankruptcy is complicated and time-consuming. Getting legal advice isn’t always cheap but it can save you money in the short term as well as the long run.

If you need help finding a lawyer or locating free legal services, check with the American Bar Association for resources and information.

Protecting your home and car from creditors is important enough to seek legal advice and it’s job No. 1 for bankruptcy attorneys.

You may qualify for help from your local Legal Aid Society. If you are low-income, options also could include nonprofit websites that help people file bankruptcy.

Remember, if you file for bankruptcy, legally you must undergo credit counseling.

All individual filers are required to complete pre-bankruptcy credit counseling and pre-discharge debtor education.

Credit counseling could help avoid bankruptcy altogether depending on your situation. A nonprofit credit counselor will review your income and expenses,  help create an affordable budget and offer advice on what the best debt-relief solution is for your situation.

One of the choices could be a debt management plan that might restore financial health without having to file for bankruptcy. Contact a nonprofit credit counselor to ask about all the options available.