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What is the automatic stay in bankruptcy?

On Behalf of | Jun 19, 2023 | Bankruptcy

Filing for bankruptcy is a significant decision impacting various aspects of an individual’s financial life. One of the immediate benefits that come with filing for bankruptcy is an automatic stay. If you’re thinking about filing for bankruptcy, know that this legal provision offers temporary relief from creditors and can play a pivotal role in providing you with much-needed breathing room.

The automatic stay is an injunction that halts creditors’ actions to collect debts from a person who has declared bankruptcy. This halt goes into effect the moment the bankruptcy petition is filed. The automatic stay is designed to temporarily stop foreclosure, eviction, wage garnishment and the disconnection of utility services, among other collection activities.

Scope of protection under the automatic stay

The automatic stay covers a wide range of actions, including:

  • Lawsuits: The automatic stay halts most lawsuits filed against you, including those seeking to obtain a judgment or enforce a previous judgment, with few exceptions like certain family court proceedings.
  • Collection activities: These include virtually any attempt to collect a debt, recover property or create or perfect a lien against your property.
  • Foreclosure actions: If you face foreclosure, the automatic stay temporarily stops the process. However, the creditor can ask the court to lift the stay and allow the foreclosure to proceed if you can’t make mortgage payments or if there’s substantial equity in the property.
  • Wage garnishment and repossession: Wage garnishment or repossession efforts are immediately halted upon filing a bankruptcy petition.

While the automatic stay is a powerful tool, it’s essential to understand its limitations. It doesn’t protect against certain specific actions, including tax proceedings, child support or alimony proceedings and criminal court orders. In cases of multiple bankruptcy filings or certain types of bankruptcy, the automatic stay may be limited in duration or not apply at all.

Also, sometimes, a creditor may ask the court to lift the automatic stay. For example, this might occur in re: a secured debt, like a mortgage, where the creditor can take back the property if you fail to make payments. Conversely, if a creditor intentionally violates the automatic stay, you may be entitled to damages. You may be awarded punitive damages if the violation is especially egregious.

Knowing your rights during bankruptcy is crucial, as informed decisions can help you make the most of the opportunity and can help you to protect your rights during the process. Seeking legal guidance is a good place to start.