The filing of a bankruptcy case, under any chapter of the Bankruptcy Code, triggers an injunction against the continuance of any action by any creditor against the debtor or the debtor’s property. In a Chapter 13 case, there is also an automatic co-debtor stay that protects, e.g., co-signers and non-filing spouses. It’s a legal matter, however, so of course there are exceptions.
The 2005 amendments to the Bankruptcy Code instituted limitations on the duration of the stay in the case of repeat filers: debtors who had a prior case pending in the last year which was dismissed get a stay of 30 days; debtors with two or more cases pending in the past years but dismissed get no stay at all. The debtor in those situations must seek a stay from the court in order to have the protection.
The automatic stay prohibits:
- foreclosure sales
- garnishment or levies
- collection calls
- beginning or continuing law suits in state or federal court.
The automatic stay does not affect actions to collect from property that is not property of the estate, criminal proceedings, actions for a family support order or the modification of such an order, tax audits, demands for tax returns or assessment of taxes (collection of taxes due is stayed).
Any person or entity who willfully violates the stay is liable for actual damages caused by the violation and sometimes for punitive damages. Some courts confine the right to recover damages to individual debtors and deny damages to corporate debtors. Since the court usually takes several days to several weeks to mail a notice of the bankruptcy to creditors, the debtor or debtor’s counsel should give actual notice, preferably in writing, to creditors who might take adverse action within a short time after filing the petition. Non-willful violations will not serve as a basis for recovering damages, so it is important to provide actual notice in a manner that you can demonstrate to the court if necessary.
Creditor actions taken after the stay is in place are generally void or voidable. Any action the creditor takes in violation of the stay has no legal effect. However, to take an example, if your car is repossessed you will be substantially inconvenienced. Again, make sure you give actual notice to any creditor that may take adverse action at or around the time of filing. If you think a creditor willfully violated the stay, or took some action that has caused actual damages, you should advise your attorney (or contact one) to discuss the circumstances.
The automatic stay remains in effect until:
- a judge lifts the stay at the request of a creditor;
- the debtor gets a discharge; or
- the property is no longer part of the estate.
In Chapter 7, the stay is in place until the discharge order is entered. In Chapter 13, the stay remains in effect for the life of the Chapter 13 plan (when a discharge order is entered). When the debtor gets a discharge, the automatic stay is replaced by a permanent injunction prohibiting creditors from all of those actions listed above with respect to discharged pre-petition debts that the automatic stay prohibited. Collection of discharged unsecured debts is permanently enjoined. Secured property, however, is another matter. In Chapter 7, the stay may prevent immediate foreclosure on a debt secured by real estate during the pendancy of the case (while all of the debtor’s property is considered property of the bankruptcy estate). The stay will expire upon issuance of the discharge order and the creditor will be free to proceed unless the property is exempt from execution under applicable law (e.g. homestead).