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.
(Not sure which bankruptcy chapter is best for you? Start by reading What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?)
What the Automatic Stay Can Prevent (at Least Temporarily)
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. (Learn more in Bankruptcy's Automatic Stay and Foreclosure).
- 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. (Learn more about Evictions and the Automatic Stay During Bankruptcy).
- 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 will happen to overdue support payments and back taxes will depend on the bankruptcy chapter that you file. (You’ll likely remain responsible after a Chapter 7 bankruptcy and pay off the debt entirely in a Chapter 13 bankruptcy.)
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, 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. (Learn more in Will Bankruptcy Stop the IRS From Collecting Tax Debts?)
- Support actions. A lawsuit against you seeking to establish paternity or to establish, modify, 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.
How Creditors Can Resume Collections: 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, defaults 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 nondischargeable (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.
(You’ll find a detailed discussion in When a Creditor Tries to Lift (Remove) the Automatic Stay.)
For More Information
To get further insight on the automatic stay and how it might apply in your situation, see The New Bankruptcy: Will It Work for You? by Cara O’Neill (Nolo).