The Automatic Stay

Edgardo Veguilla-Gonzalez, Esq.

One of the most important advantages for a debtor who files for bankruptcy is the automatic stay of all collection efforts against him and his assets. The stay is automatic since it is not necessary for the bankruptcy judge to issue any particular order, it goes into effect upon the filing of the bankruptcy case. Once the stay is in effect, many of the most common collection efforts are prohibited, and any creditor who violates the stay is exposed to sanctions. In addition, those actions that are carried out while the stay is in effect and which run afoul of it can be annulled by the bankruptcy court. The debtor whose wages had been garnished for the payment of debts will benefit to the extent that said garnishment must stop immediately after filing for bankruptcy. Even lawsuits against the debtor pending in other courts are paralyzed by the filing of a bankruptcy petition.

The main purpose of the stay is not to eliminate debts permanently, but to provide the debtor with a breathing space, so that he can concentrate on his bankruptcy case and resolve his debts, without being  overwhelmed by the innumerable demands of creditors.

How can the stay help me stop a collection lawsuit?

Many people find out that a creditor has filed a collection lawsuit when they receive the citation for said lawsuit. The citation informs you of your opportunity to file an answer to the lawsuit. If you file an answer, the court will schedule either a trial or a pre-trial hearing to discuss any issues, such as witnesses to be called at trial. If you do not answer the lawsuit, the court may deem the allegations in the lawsuit as admitted and proceed to issue a default judgment against you without giving you any further notice.

The filing of a bankruptcy activates the automatic stay provided for in the Bankruptcy Code, and therefore any trial or pre-trial hearing cannot be held, since it is part a creditor’s efforts to collect a debt against you.

In this example, the debtor received the citation on September 8 for the lawsuit filed on August 29. When the debtor files his bankruptcy on September 18 (the "Filing Date"), the deadline to answer the lawsuit before September 22 is stayed. If the plaintiff, already aware of the debtor's bankruptcy, insists on their collection efforts or tries to induce the Court to issue a default judgment regardless, they will be in clear violation of the Bankruptcy Code and may face sanctions from the Bankruptcy Court. Additionally, any judgment obtained by the plaintiff after the bankruptcy petition can be annulled by the Bankruptcy Court.

How can the stay help me stop the repossession of my car?

The bank or company that lent the money for the purchase of the car, which serves as collateral for the payment of that debt, can repossess the vehicle if there's a delay in payments. When this happens, the creditor will contact the debtor to inform them that they will repossess the vehicle. Once the debtor files for bankruptcy, the creditor has to halt all collection efforts, including the process of repossessing the car.

In this example, the debtor receives a call from the creditor on July 15, indicating that they will repossess the car due to non-payment. Once the debtor files his bankruptcy on July 17, the bank is obligated to halt all collection efforts, including the attempt to repossess the car on July 19, as previously planned. If the creditor, knowing about the debtor's bankruptcy, insists on their collection efforts and repossesses the vehicle on July 19, they will be in violation of the Bankruptcy Law, may be subject to sanctions, and the Bankruptcy Court can order them to return the car to the debtor.

How can the stay help me stop wage garnishment?

Certain creditors with debts such as unpaid federal taxes, federal student loans, child support, and spousal maintenance have the legal authority to garnish part of the wages of those who owe them money and have not reached any payment arrangement. Wage garnishments are also prohibited collection efforts when the debtor files for bankruptcy.

In this example, the debtor's paychecks dated March 30 and April 15 have been subject to garnishment. Once the debtor files for bankruptcy on April 23, all subsequent paychecks must be received in full—that is, without any money being deducted for garnishment. If, due to error or lack of knowledge, the debtor's employer withholds additional funds after the bankruptcy has been filed—whether the employer or the creditor (if the latter has already received the funds)—they may be ordered to return those funds to the debtor.

If you need help from an attorney, [Click here].