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Why Does Bankruptcy Stop Foreclosure, Garnishments and Lawsuits?

Immediately when your bankruptcy case is filed, an automatic stay is created.  An automatic stay is an Order put in place by the Bankruptcy Court that is intended to give bankruptcy filers some financial relief while their case is pending.  It is the equivalent of a restraining order that prevents creditors from taking certain collection actions against you.  These collection actions include:

  • Filing lawsuits against you or continuing with lawsuits that are already in process;
  • Repossession attempts;
  • Foreclosure proceedings;
  • Telephoning you to collect a debt at home, on your cell phone, or at work;
  • Wage or bank garnishments;
  • Recording any liens or judgments;
  • Anything that attempts to collect a debt or improve a creditor’s position as it relates to a debtor and the underlying debt.

How Long Does the Stay Last?

Chapter 7:

Unless modified by the bankruptcy court, the duration of the automatic stay is controlled by the Bankruptcy Code in Section 362. In Chapter 7 cases involving individuals, the stay remains in effect until the case is closed, dismissed or a discharge is granted or denied. Additionally, in the Chapter 7 scenario, if the stay involves an action against property of the debtor’s estate, the stay remains in effect so long as the asset is being administered by the estate. With respect to partnerships and corporations in Chapter 7, the stay remains in effect so long as the case has not been closed or if the property is still being administered. Once the case is closed, the stay is lifted and creditors can proceed to collect any debt or foreclose on any property that was not dealt with in the bankruptcy case.

Chapter 13:

In Chapter 13, the stay remains in effect until the plan has been confirmed or the case has been closed or converted. Additionally, with respect to the co-debtor’s stay, even if a plan is confirmed, the co-debtor’s stay remains in effect permitting the creditor to only look to the co-debtor for such amounts as will not be collected under the plan if it is fully performed. Thus, if a Chapter 13 plan provides for a 55 percent distribution to creditors over three years, an action may not be brought against the guarantor for more than 45 percent of the debt.

Creditors Can Get the Automatic Stay Lifted Early:

A creditor may also request that the automatic stay be lifted early by filing a Motion for Relief from the Automatic Stay (MFRS). A MFRS basically is a proceeding that is initiated by the creditor to end the restraining order against them. It is a proceeding to allow them to continue whatever course of conduct they were pursuing, but for the filing of the bankruptcy case. So if they were in the process of foreclosure of a home or repossession of a vehicle, your bankruptcy froze that process. The MFRS simply allows them to pick up where they left off.

If they were about to sell the house, and you filed a bankruptcy the day before the sale date, they can now continue forward with their sale (which has probably been continued from date to date until this relief order has been entered so watch out since it may even be the day the Judge signs the relief of stay order).

The Automatic Stay Is Not Absolute

There are exceptions to the automatic stay, especially in the case of re-filings.

Creditor actions are not stayed in the following circumstances:

Criminal Actions:  Filing a bankruptcy will not prevent federal, state or local authorities from pursuing their criminal action against you.

Support:  Lawsuits involving child support or spousal support are not stayed and can be pursued despite your bankruptcy filing.

Government Action: Actions by the governmental to enforce police power are not stayed.

Multiple Bankruptcy Case Filings:

If you file a second bankruptcy case within one year of a prior filing, the automatic stay will only go into effect for thirty days, unless you can prove to the court that the second filing was filed in good faith.  You must file a motion and have it heard before the Judge prior to the expiration of the thirty day period.  The motion can be brought against one particular creditor, or more likely, against all creditors.  After notice and a hearing, the court will rule one way or another.  The debtor has the burden of proving that the second case was filed in good faith.  This can be accomplished by showing a positive change in circumstances such as higher, more stable income.  Additionally, the debtor may have recovered from a serious medical condition which had prevented him from gainful employment.

If you file a third bankruptcy case within one year of two prior filings, the automatic stay will not go into effect at all.  The debtor can attempt to invoke the automatic stay by bringing a motion, similar to the one mentioned above, showing that the third filing was made in good faith.  Although not impossible, it would require a very compelling reason to convince the court to allow the stay to be imposed on a third filing within one year.

Evictions:

In eviction cases, if the landlord has already obtained a judgment for possession prior to the bankruptcy case filing, then there is no automatic stay.  A debtor should file bankruptcy prior to the landlord obtaining a judgment so that the stay can go into effect. There is also no stay if the eviction is based upon endangerment of the rental property or an illegal use of controlled substances is occurring on the premises and the eviction started prior to the bankruptcy case being filed.

For more information about the automatic stay, please contact bankruptcy attorney Kristy Hernandez for a free consultation or visit our website: www.khlawoffices.com.


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