The filing of a petition under Chapter 7 or Chapter 13 automatically gives rise to an injunction staying collection actions against the debtor or the property of the bankruptcy estate. While the stay is in effect, creditors may not initiate or continue lawsuits or wage garnishments, or make telephone calls demanding payment. In Chapter 13, the stay may also protect co-debtors who are liable with the debtor on consumer debts. In some situations, the stay may be effective only for a short time and there are numerous situations where the stay does not apply at all.
The stay arises by operation of law and requires no judicial action. The bankruptcy clerk gives notice of the bankruptcy filing and the automatic stay to all creditors whose names and addresses are listed in the bankruptcy documents. But because the court may take several days or even weeks to mail the notice to creditors, it is often necessary for the debtor or debtor’s counsel to give actual notice to creditors who might take action without knowledge of the stay. A creditor who willfully violates the stay may be liable for actual damages caused by the violation as well as punitive damages.
The automatic stay remains in effect while the bankruptcy case is pending unless the court lifts it for cause at the request of a creditor or until the debtor is granted or denied a discharge of debts. The duration of the automatic stay may be shortened or inapplicable in cases involving a debtor who has made multiple bankruptcy filings. In these instances, the debtor must take specific action to prove that the current bankruptcy was filed in good faith in order to obtain a stay.
The automatic stay can prevent utility services from being disconnected, at least temporarily, giving the debtor some time to pay. It can also provide a little breathing room – though not much – if the debtor is facing a residential eviction. The automatic stay can also stop or prevent a foreclosure or repossession, although the effect will be different depending on the type of bankruptcy. Under Chapter 7, the automatic stay will stop the foreclosure or repossession initially, but the debtor’s default on payments will give the court cause to lift the stay at the secured creditor’s request and allow the action to proceed. Under Chapter 13, on the other hand, the stay of a foreclosure or repossession will continue for the duration of the bankruptcy, so long as the debtor makes all the arrearage and current mortgage payments called for in the plan.
Examples of the many exceptions to the automatic stay include: criminal proceedings; various domestic matters including divorce and support actions; tax audits, demands for tax returns and tax assessments (though tax collection may be subject to the stay); and residential eviction actions in which the lessor obtained a judgment for possession of the property before the bankruptcy was filed or which involve endangerment of the property or illegal use of controlled substances on the property.
When the debtor obtains a discharge of debts, the automatic stay is replaced by a permanent injunction prohibiting the same acts covered by the automatic stay. After a discharge in bankruptcy, creditors may not initiate or continue any legal or other action to collect a discharged debt. But some debts may not be discharged at the end of a bankruptcy – common examples include child support, taxes, and educational loans – and the permanent injunction does not apply to those.
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