Freezing Foreclosure and Auto Repo with The Automatic Stay

Now we are going to spend a few minutes discussing a central bankruptcy concept known as the “Automatic Stay”. As we’ve highlighted before, one of the main advantages to the bankruptcy process is an orderly handling of many different creditor claims against the debtor. Ultimately, the system is designed to treat all similar creditors equally.
LISTEN NOW: The Automatic Stay

The companies with these claims may be using a variety of collection tactics at the time of a bankruptcy filing including telephone calls, repossessions or foreclosures, filing court cases or attempting to execute on a judgment by garnishment, levy or seizure. Because the Bankruptcy Court needs time to sort out the situation before any of the assets are passed into other hands, as soon as a bankruptcy petition is filed, all actions by creditors go through the Bankruptcy Court and all their collection activity must cease.

You can imagine the power of the Automatic Stay. Everything that is happening has to come to a stop! For this reason alone, the power of filing a bankruptcy petition becomes quite appealing to debtors.

Now, understand that the Automatic Stay is truly automatic. This means that as soon as the case is filed, all other activity needs to stop. Of course, the law recognizes that the actual notice may not arrive for several days after the filing, so a court will not assess damages against a creditor without actual notice unless there are specific circumstances. What it does mean, though, is even without notice, any ruling by another court or any collection action is void, and must be reversed as soon as the other party is able.

Here are two real life examples. Let’s say that your car payments are late, and you know that the car finance company has ordered a repossession. Once you file the bankruptcy petition, the finance company cannot take the car back. In another common example, a mortgage company is looking to foreclose on your house. Even if the Trustee sale is to be held thirty minutes from the time your case is filed, the sale cannot occur. You can imagine the power of the Automatic Stay in these situations.

Generally, the Automatic Stay lasts throughout your case. A creditor can ask the court to lift the Automatic Stay, and this is usually done in cases where there is a secured debt involved and the creditor wants to either foreclose on real estate or repossess personal property like a carThe Stay is terminated after your case is discharged unless there is a specific exception in the law. For example, child custody proceedings are not affected in any way by the filing of bankruptcy. Tax audits aren’t stopped by bankruptcy. Proceedings to revoke a driver’s license aren’t stopped by the Automatic Stay. But the exceptions are rare.

However, there is a process for lifting the Automatic Stay. The creditor must ask the court for permission, and in most cases where the party is requesting control of secured property, the court will give them permission.

One quick note about landlords when renting a place. Oftentimes, the tenant has fallen behind on payments. The bankruptcy code has a special section discussing this situation. When a debtor files for bankruptcy, he or she must deposit with the court, any amount of rent that will be due in the first 30 days after the bankruptcy petition was filed. The clerk of the court will send that money to the landlord. By following this procedure, the landlord cannot proceed with any eviction action. The obligation to continue to make rent payments in the future remains.

There is another area where the Automatic Stay has a short shelf life. If you’ve previously filed a case within the previous one year period, then the Stay automatically expires after 30 days. If you have two cases dismissed in a year, there is no Automatic Stay protection at all.

Violators of the Automatic Stay are generally treated quite harshly by the courts. This is an area of the law where the protection of the bankruptcy court is most important. For willful violation of the Stay, courts can award actual damages, and also punitive damages and attorney fees. It is very important to report all contacts or actions by creditors to your attorney or the court immediately.

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