What Is the Automatic Stay and How Does it Protect Debtors in Chapter 7 and 13 Bankruptcy?

In several previous entries, I’ve touched upon this thing called the Automatic Stay in the Chapter 7 and Chapter 13 bankruptcy process, but I haven’t fully described what it is and what it means to Detroit, Michigan-area residents considering filing for bankruptcy.

The Automatic Stay is one of the primary and most immediate benefits of filing for bankruptcy. In short, it is a stay against nearly all collection attempts by creditors upon individuals who filed a Chapter 7 or Chapter 13 bankruptcy petition, and it is enforced automatically upon the filing of those petitions. In other words, the moment that a personal bankruptcy petition is filed, it becomes a violation of Federal law under the § 362 of the US Bankruptcy Code for creditors of that filing individual to do anything that would qualify as an attempt to collect their debt, including phone-calls, letters, foreclosures, reposssessions of property, set-offs of funds, perfection of liens, garnishments, civil collection lawsuits, etc. Some creditors are not barred by the Automatic Stay, such as those collecting for past-due child-support and for criminal penalties, but, otherwise, every creditor that you owe money to is barred from trying to collect it while the Automatic Stay is in place.

The Automatic Stay lasts from the filing of the petition through the granting of the discharge, roughly a 3.5 to 4-month period. Thus, it is not a permanent stay against collection attempts, but it is generally sufficient to keep the creditors off of filing individuals’ backs while the bankruptcy petition is in process. For most unsecured debts, such as credit-cards and medical bills, it is effectively permanent as these sorts of debts in a Chapter 7, at least, are discharged at the end of the period virtually without fail.

While the Automatic Stay is in effect, any creditor who wishes to proceed to collect from you must first file a motion with the bankruptcy court to lift the Automatic Stay. This can happen in various circumstances, most often with regard to secured creditors who would like to repossess or foreclose upon the collateral securing their loan to you. Short of filing a motion of this sort and receiving a favorable outcome from the court, commercial creditors are unable to proceed against you during your bankruptcy process.

However, the Automatic Stay is not magic: creditors have to know that you have filed for bankruptcy in order to abide by it. Thus, it is crucial that you ensure that your bankruptcy attorney has each and every creditor that you owe any amount of money to listed completely and accurately in the petition. If a creditor is listed in the petition, that creditor will receive a notice from the bankruptcy court upon the filing of your petition that alerts them to the fact that the Automatic Stay is now in effect.

For that reason, it is vital that you work closely with your attorney and work hard to provide him or her with all of the information needed to fully complete your petition.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.