Deciding to declare bankruptcy can be stressful and difficult because this decision could impact your relationships, credit score, and emotional health. However, it could be your only choice at some point if you have burdensome debts from different creditors and they are not stopping from harassing you.
Once you file for Chapter 7 or Chapter 13 bankruptcy, an automatic stay will go into effect immediately, requiring all your creditors to stop their debt collection efforts, including lawsuits and harassing phone calls. If you have overwhelming debts, bankruptcy’s automatic stay can give you the relief you need to fix your current financial situation.
However, the protection or relief that bankruptcy gives you does not mean it is the right solution for your financial problems. Before taking any legal action, including filing for bankruptcy, it is important to understand its possible impacts or ramifications on your life. A bankruptcy attorney can help you determine whether declaring bankruptcy is an excellent solution for your unique financial situation.
Read on to learn what an automatic stay is and how this court’s protection can help you regain control of your financial life.
How an Automatic Stay in Bankruptcy Works
According to Section 362 of the bankruptcy code, an automatic stay would kick in automatically as soon as a debtor, including businesses, files a bankruptcy petition. An automatic stay will allow you to address your business problems and give you a much-needed break from the nerve-wracking pressure of living in debt.
Once an automatic stay is in place, it will be illegal for your creditors and debt collection agencies to continue their debt collection actions against you during the duration of your unique bankruptcy case. The advantages of the automatic stay are often the primary consideration when deciding whether to declare yourself bankrupt.
What an Automatic Stay Can Do Once You File for Bankruptcy
Here is how bankruptcy’s automatic stay can help if it is challenging to stay afloat financially due to burdensome debts:
Stops Debt Collection Lawsuits Filed Against You
When any of your creditors file a lawsuit against you, you will be notified about it to prepare your response to the lawsuit. After filing your official legal response to the suit, the court will schedule a hearing, which you and your lender should attend to give your arguments on the case. Then, the judge will ultimately decide who wins the case, also known as judgment.
When the court’s judgment is against you, you will be legally responsible for paying that specific debt. If you cannot or will not pay, your creditors can ask the judge to allow them to collect their money using other means, like wage garnishment and bank levies.
Fortunately, you can prevent this by filing for bankruptcy before the creditor receives a verdict or judgment on the pending lawsuit against you. Once you legally declare yourself bankrupt, the stay will temporarily stop all pending suits against you.
Even when the lawsuit’s verdict is against you, legally declaring yourself bankrupt is beneficial. When the verdict is for a loan ordinarily dischargeable through bankruptcy, the court will allow you to discharge this debt.
Stops Foreclosure Proceedings
If you are behind on your mortgage payment, bankruptcy’s automatic stay could stop your mortgage lender from filing a foreclosure proceeding against you. Even if your lender has filed foreclosure proceedings against you, the automatic stay could stop further proceedings against you as long as the property has not already been sold at a foreclosure auction.
What happens after that typically depends on the type of bankruptcy you file. For example, if you want to retain your home and have a constant income, Chapter 13 will be the better bankruptcy option to clear your debt within three (3) to five (5) years.
Conversely, Chapter 7 does not have a strategy that will permit you to hold your property or home if you are behind on repayment, meaning the relief an automatic stay will provide is temporary. Your attorney will help you decide which bankruptcy chapter will work to your advantage and file it on time before your mortgage lender starts foreclosure proceedings.
Stops Eviction Temporarily
An automatic stay will give you temporary help if you are facing eviction. as long as your landlord has not received a judgment to repossess the apartment. However, the stay will not stop the eviction process if the landlord has already received a judgment against you.
Although an automatic stay can stop eviction proceedings, you will not live there rent-free for long because the court could lift it, allowing the landlord to continue eviction proceedings. Additionally, the landlord has the right to evict you from his/her property if you damage it or use unlawful drugs in your apartment.
Stops Wage Garnishment Proceedings
If you have defaulted on a debt, your creditors can file a lawsuit against you to secure wage garnishment. Wage garnishment is a court-ordered deduction from your salary to pay a debt. The type of debt you have will determine how much your employer will deduct from your paycheck to pay your creditors.
Fortunately, even if wage garnishment proceedings have started, bankruptcy’s automatic stay can stop its impact on your financial life. Stopping wage garnishments or deductions can help you open up enough money that would not otherwise be available to support your family and live a comfortable life.
However, if the reason for wage garnishment is to pay alimony or child support, the automatic stay will not help because these debts are not dischargeable when you file for bankruptcy.
Stops Repossession of Your Property
Like foreclosure, an automatic stay can stop a lender from repossessing your car or any other property to recover his/her debt. If you are worried about losing your vehicle to your debtors, filing a Chapter 13 bankruptcy can allow you to pay your auto debt over a court-approved period.
A bankruptcy attorney can help you file your Chapter 13 bankruptcy and attach the necessary evidence to obtain the best possible outcome.
Prevents Temporary Shut-Off or Disconnection of Your Utilities
Although your defaulted utility is a reason to declare yourself bankrupt, it makes sense to file for bankruptcy when you have other urgent loans you want the court to discharge. If you are behind on your utility bills and the company threatens to shut off your electricity, water, telephone service, or gas, an automatic stay can prevent the shut-off for at least twenty days.
Stops Threatening Phone Calls from Your Creditors
Another reason you would want to consider declaring yourself bankrupt is to stop your creditors from making threatening phone calls and sending texts whenever they want. Once a bankruptcy’s automatic stay goes into effect, the court will bar all creditors from contacting you until the case ends.
How Long Will an Automatic Stay Remain in Effect?
An automatic stay will remain in effect as long as your bankruptcy case is active. However, the bankruptcy chapter you decide to file will determine how long an automatic stay will remain in effect. For Chapter 13 bankruptcy, it could remain active for three (3) to five (5) years, but for Chapter 7 bankruptcy, the stay will remain in effect for only a few months.
If the court dismissed your bankruptcy case in the past year, the automatic stay would remain in effect for only thirty days on your second petition. However, an automatic stay will not go into effect if you have had two pending bankruptcy cases in the past year unless the court determines filing three petitions is reasonable in your financial situation.
What Bankruptcy’s Automatic Stay Will Not Prevent
While an automatic stay offers crucial protections to people in debt, there are instances where bankruptcy’s automatic stay will not help. In the previous paragraph, we mentioned that an automatic stay would not prevent wage garnishment for alimony and child support. Aside from that, an automatic stay will not prevent the following:
- Criminal proceedings – If you are guilty of any crime requiring you to pay a fine or perform community services as part of your sentence, an automatic stay will not prevent that
- Certain tax proceedings – The Internal Revenue Service (IRS) can still audit you, demand tax returns, or issue a notice of tax deficiency after filing for bankruptcy, but the automatic stay will prevent them from seizing any of your property or issuing a tax lien
- Withholding of most job-related pensions – Even if an automatic stay is in effect, your employer will still deduct a portion of your salary to pay a debt from certain pensions
What to Expect When Your Creditors File a Motion to Lift an Automatic Stay
Your creditors could go around an automatic stay by petitioning the bankruptcy court to remove or “lift” the stay. If the court grants their petition, the creditors will resume their collection efforts and will not face a fine or penalty. Generally speaking, many motions to remove a bankruptcy’s automatic stay involve the following:
- A tenant/landlord dispute
- A foreclosure action
- A lawsuit filed in a different court
Regardless of the reason for requesting the removal of an automatic stay, the court will not accept the petition unless the petitioner can prove that:
- The stay will make him/her lose money
- You do not have equity in the assets or properties that you can use to pay other lenders
- You do not have a way of retaining the property
- The lien on the property or asset gives him/her the right to sell or auction it to settle outstanding mortgage
- He/she has an ongoing lawsuit against you in another court, and it would be reasonable to continue with the suit
How a Bankruptcy Attorney Can Help if You Want to Enjoy the Effects of an Automatic Stay
Hiring a bankruptcy attorney has several advantages you cannot overlook if you want to enjoy the effects of bankruptcy’s automatic stay. The bankruptcy attorney you will hire will help you:
Determine the Right Bankruptcy Chapter to File
A seasoned attorney can listen to your financial situation and assist you in deciding whether to file Chapter 7 or Chapter 13 bankruptcy to regain control of your financial life.
Prepare Documentations Necessary When Filing for Bankruptcy
After deciding the bankruptcy chapter most suitable for your unique case, your attorney will help you prepare the necessary documentation. Declaring bankruptcy legally is a paper-intensive process, but your attorney will help you prepare all the needed documents and file the petition on your documents. Some of the documents your attorney could need include the following:
- Paystubs
- Tax returns in the past three years
- Recent bills from each of your creditors
- Car titles
- Bank statements
- Evidence of alimony or child support
- Insurance policies
- Promissory notes that you have signed
The specific documents your attorney will require will depend on the bankruptcy chapter he/she finds suitable for your unique financial situation.
Challenge any Creditor’s Request to Remove an Automatic Stay
If a creditor files a motion to remove an automatic stay, a court will hold a hearing to determine whether to grant the request. During this hearing, your attorney will tell your side of the story and present reasons to show the court that the automatic stay is necessary for your situation.
Take Away Points
Unlike what many believe, filing for bankruptcy does not mean you have poor financial choices or are a deadbeat. If you have overwhelming and burdensome debts, an automatic stay can give you peace of mind from all the demands and pressures of your creditors.
When an automatic stay is in effect, you can fix your financial problems without worrying about losing any of your property through foreclosure. If your creditor violates an automatic stay, you can sue him/her to recover damages, including the legal fees you have incurred.
Find a Trustworthy Bankruptcy Attorney Near Me
While filing for bankruptcy can help if you are in a debt trap, an automatic stay is part of this process and will give you immediate peace of mind. If you need legal help filing for bankruptcy or want to learn more about the automatic stay and its benefits, our attorneys at Sacramento Bankruptcy Lawyer are here for you.
We will work hand in hand with you to find the best solution for your unique financial situation. Call us at 916-800-7690 for an obligation-free consultation with our credible bankruptcy attorneys.
