The automatic stay is a provision under U.S. bankruptcy law that protects you against bill collectors once you file for bankruptcy. This law prevents creditors, government agencies, collection agencies, and others from pursuing you to pay the debts you owe them. The creditors cannot continue trying to collect debts from you until the completion of the bankruptcy proceedings. If collection agencies, creditors, or other parties violate the automatic stay, the debtor can sue them. If your assets are likely to lose significant value before the resolution of your bankruptcy case, creditors can request the court to lift the automatic stay. If you want to understand an automatic stay and how it works, we invite you to contact the Los Angeles Business & Real Estate Law Firm.
Understanding An Automatic Stay
Under Section 362 of the U.S. Bankruptcy Code, an automatic stay takes effect when you file for bankruptcy. The automatic stay applies to all chapters of the Bankruptcy Code (Chapter 7, Chapter 11, and Chapter 13). It also applies to both individuals and businesses. The automatic stay protects the debtor against specific actions that creditors can take, including initiating or continuing legal proceedings against the debtor, imposing a lien over the debtor’s properties, or trying to repossess the property used as collateral.
Debtors can sue creditors who continue to contact them or take legal action against them when the automatic stay is in place. The benefits of an automatic stay are a critical motivating factor when filing for bankruptcy. An automatic stay also puts all creditors on the same level, meaning that one creditor cannot seize the debtor’s property, leaving the other creditors with nothing to claim.
After the automatic stay, creditors will not likely receive the total amount owed. Instead, they will receive a particular share of the debtor’s limited assets. Some creditors, usually those with sufficient grounds, can file a petition in court to have the automatic stay lifted, enabling them to continue the collection process against a debtor.
The Protection Offered By An Automatic Stay
An automatic stay can prevent specific actions, albeit temporarily:
It Can Stop A Foreclosure
An automatic stay can stop the foreclosure proceedings if a lender intends to foreclose on your home. However, how long this protection lasts will depend on the type of bankruptcy you file. A Chapter 13 bankruptcy is the best option if you would like to keep your home because it allows you to catch up on your payments, usually in three to five years.
However, if you are behind on your loan payments, Chapter 7 bankruptcy does not have an arrangement that allows you to retain your home. Therefore, the relief of an automatic stay will only be temporary.
It Can Stop Evictions Temporarily
An automatic stay can help if you are facing eviction from your home, but this relief is temporary. However, it is essential to note that an automatic stay will not stop the eviction if your landlord had already obtained a judgment of eviction by the time you filed for bankruptcy. In this case, the landlord will continue as if you had not filed for bankruptcy.
An automatic stay will also not protect you if the landlord states that you have been endangering the property or using drugs/controlled substances on the property.
Erasing Public Benefit Overpayment Collection
The responsible government agency must collect the overpayment if you receive an overpayment of public benefits. The overpayment can be recovered from your direct or future checks if you are not receiving benefits. When you file for bankruptcy, you can erase the overpayment since the automatic stay will prevent any collection against you.
Helps You Avoid Wage Garnishment
The automatic stay will protect you against wage garnishment when you file for bankruptcy. Therefore, you will take home your entire salary. You can also discharge qualifying debts like personal loans and credit card balances.
It is important to note that the automatic stay will not stop or discharge certain payments, like ongoing alimony and child support. For example, perhaps you have back taxes or overdue support payments. What will happen to these payments will depend on the bankruptcy chapter you file.
For example, you can pay off the debt under Chapter 13 bankruptcy. However, if you file for Chapter 7 bankruptcy, you will still be responsible for back taxes and overdue support payments.
Temporarily Stops Utility Shutoffs
If you are behind on your utility bills like gas, electric, water, and telephone service, the automatic stay can prevent the disconnections of the services for a minimum of 20 days. The amount of outstanding utility bills is not likely to be large enough to justify a bankruptcy filing. Bankruptcy is only suitable if you have other significant debts to discharge alongside your utility bills. However, many utility payments require you to pay a deposit to avoid future default.
The Limitations Of An Automatic Stay
An automatic stay will not protect you in several instances:
Tax Proceedings
Even when an automatic stay is in place, the IRS can still issue a tax deficiency note, audit you, demand a tax return, issue you a tax assessment, and demand payment. However, the IRS cannot seize your property or issue a tax lien against it.
You could still be responsible for the outstanding taxes even after bankruptcy. This will depend on whether you file for bankruptcy under Chapter 7 or Chapter 13.
Alimony Or Child Support Actions
If a lawsuit is filed against you to establish paternity, an automatic stay will not protect you. An automatic stay will not stop any action from collecting, modifying, or establishing alimony or child support.
Loans From Job-related Pensions
An automatic stay cannot stop your employer from withholding money from your income to repay your outstanding loans from certain pensions, like IRAs and other job-related pensions.
Criminal Proceedings
If there are criminal proceedings against you, filing for bankruptcy will not stop these proceedings. For example, the court could have ordered you to pay a fine or engage in community service after a conviction for a criminal offense. Therefore, filing for bankruptcy will not stop the proceedings against you.
How Long An Automatic Stay Protects You
How long the automatic stay protects you depends on the type of bankruptcy. For example, in a Chapter 7 bankruptcy, the automatic stay will cover you for the whole period of the bankruptcy case. However, in a Chapter 13 bankruptcy, the automatic stay will be effective until the court approves or confirms your repayment plan. After the Chapter 13 bankruptcy repayment plan is confirmed, the creditors must abide by the repayment terms outlined, provided you do not fail to make the payments as agreed.
However, there are some exceptions. For example, the automatic stay will only last 30 days if you filed for bankruptcy in the previous year. In addition, the bankruptcy court would not approve the automatic stay if you filed for bankruptcy twice in the last year.
Even if you had filed for bankruptcy once or twice in the previous years, you could still file a motion requesting the bankruptcy court grant you an automatic stay. However, the court will presume that you acted in bad faith if a creditor filed a motion to lift the automatic stay during your previous case. Therefore, you will only have an automatic stay for your current case if you overcome this presumption.
When Creditors File A Motion To Lift The Automatic Stay
A creditor can file a motion in bankruptcy court requesting the court to lift or remove the stay. If a creditor continues the collection efforts without filing this motion, he/she could face fines and penalties. A motion to dismiss or lift the automatic stay usually involves the following:
- A tenant/landlord dispute
- A foreclosure action.
- A lawsuit in another court
A creditor must prove certain aspects for the bankruptcy court to grant the motion to remove an automatic stay. For example, it should be evident that the automatic stay will make the creditor lose money. A creditor should also prove that the automatic stay has no financial benefit and could cause other creditors harm.
For example, your house could be in the process of foreclosure. However, you decide to sell the house one day before the planned foreclosure, yet the following applies:
- You do not have any equity in the home.
- Therefore, you cannot catch up on the outstanding mortgage arrears.
You could wonder how long it takes before creditors file a motion to lift the automatic stay. In most cases, creditors intending to file a motion to remove an automatic stay will go to court soon after you file for bankruptcy. For example, in the case of a mortgage loan, the lender will outline that when you applied for the loan, you used the house as collateral. The creditor could also state that the lien on the property allows them to recover it through foreclosure if they default on the agreed-upon payments. In this case of secured debt, the house was used as collateral to guarantee payment. The lien on the property gives the lender a right over the house, above other creditors.
Challenging A Motion To Lift An Automatic Stay
A debtor can oppose the motion to remove the automatic stay by appearing before a judge. If the creditor wins, the court will grant the motion, allowing the creditor to continue the recovery process. The court is likely to grant the motion in the following circumstances:
- The debtor has no equity in the property that can be used to pay other creditors.
- The debtor cannot keep the property since he/she cannot even afford the mortgage payments.
- The creditor has a lien on the property, giving them the right to recover the property in case of default, sell the home at an auction, and use the home sale proceeds to clear the outstanding mortgage.
- The longer the bankruptcy court sustains the automatic stay and prevents the lender from recovering the property, the more money the lender loses. There will be no gain to other creditors.
The court is not likely to grant the motion to remove the automatic stay if there is enough equity in the property that the buyer can use to make future payments to the lenders. This is what we call an equity cushion. The court could also deny the motion if the creditor does not stand to lose any money.
Other Reasons Why A Creditor Could File A Motion To Remove An Automatic Stay
Sometimes, a creditor could have filed a lawsuit against the borrower in another court when filing for bankruptcy. The creditor could request the bankruptcy court allow them to continue pursuing the case in another court, for example, a state court. The bankruptcy court could grant the motion if the other lawsuit does not involve a potential creditor.
The bankruptcy court will likely grant the motion if the trial has been ongoing for some time, and certain issues must be resolved to determine if the outstanding debt should be discharged. For example, the borrower could be facing fraud charges. Usually, the bankruptcy court will wait for the ruling made by the other court and adopt the outcome instead of having the litigants begin again.
Types Of Relief From An Automatic Stay
The nature of relief from an automatic stay will depend on the unique facts of every case and whether the grounds for relief are present. The type of relief granted depends on the court’s discretion. The available relief types include termination, annulment, modification, and conditioning.
- Termination — With termination, the automatic stay is over, and the court is free to take action against the debtor.
- Annulment — When an automatic stay is annulled, it will be as if it never existed. The annulment of an automatic stay validates any actions taken when the automatic stay was still in place. An annulment is a rare remedy. It is usually available when there is wrongdoing on the debtor’s side. It is also available to innocent creditors, unaware that the debtor had filed for bankruptcy and an automatic stay was in place.
The court could also annul the automatic stay after learning that the debtor did not file for bankruptcy in good faith. When weighing the equities, the court considers the debtor’s and the creditor’s conduct. This relief is rare and only granted in compelling, unusual circumstances.
- Modification — This involves altering an automatic stay to permit certain acts. For an automatic stay to be modified, there must be evidence that continuing with the stay could harm the creditor. For example, the court could amend an automatic stay to allow creditors to repossess particular property or to enable ongoing trial in a state court to continue.
- Conditioning — The court can condition an automatic stay’s modification, termination, or continuance under certain circumstances. For example, if each party complies with the fact that they will file a joint motion to merge the case with a pending case on remand of a case to the state court, the modification of the automatic stay may be conditioned.
Violation of the Automatic Stay
What happens when a creditor violates the automatic stay?
If a debtor is injured or suffers damages because of the willful violation of the automatic stay by the creditor, the debtor can recover damages. The available damages include attorney’s fees, punitive damages, and other costs incurred due to the violation. Wilfulness does not mean that the creditor intended to violate the automatic stay. It only means that the creditor’s actions were intentional or committed on purpose. Even if the creditor had a good faith belief that their action complied with the automatic stay, the court would not consider this belief as a defense to the violation.
However, the creditor is not guilty of violating an automatic stay if the law that governed the alleged violation was uncertain. The defendant will also not be guilty of violating an automatic stay if he/she, in good faith, relied on a persuasive legal authority to support the position.
In a wilful violation, the court could allow the debtor to recover the costs incurred in paying for the attorney’s fees to stop the violation and litigate a damages claim following the violation. The attorney’s fees will include those incurred in defending the damages awarded after the appeal.
The courts impose severe sanctions for willful violations of automatic stays. However, courts are not too hard on creditors who inadvertently violate an automatic stay or those who do so in good faith.
How an Attorney Can Help
When defending a motion to remove an automatic stay, it is best to seek the guidance of an experienced bankruptcy lawyer because the litigation can turn out to be complicated. An attorney will also help you weigh your options to determine whether you should file for Chapter 7 or Chapter 13 bankruptcy.
Find a Business & Real Estate Attorney Near Me
An automatic stay takes effect immediately after a debtor files for bankruptcy. It stops creditors and other collection agencies from acting against the debtors. Debtors can sue creditors and collection agencies that violate an automatic stay. However, an automatic stay does not apply to certain debts, like spousal and child support. It does not also apply to any money you owe because of a criminal proceeding. The automatic stay ceases when the bankruptcy case is dismissed. If you need guidance on an automatic stay, including how it works, we invite you to contact the Los Angeles Business & Real Estate Law Firm. Call us at 310-796-7794 to speak to one of our attorneys.
