The Bankruptcy Automatic Stay Against Collections: The First, Quickest Benefit of Chapter 7 & Chapter 13 Bankruptcy
The Bankruptcy Automatic Stay: A Master Injunction Under Federal Law Protecting You From Creditor Harassment
The Bankruptcy Automatic Stay Against Collections is one of the primary and most immediate benefits of filing for bankruptcy. It is an injunction under the Federal law of the US Bankruptcy Code which stays, or stops, nearly all collection attempts by creditors upon the filing of a Chapter 7 or Chapter 13 bankruptcy petition. The initial filing of the petition triggers the Bankruptcy Automatic Stay. You do not have to await your actual bankruptcy discharge, which does not occur for approximately 4 months in the typical Chapter 7 bankruptcy or 3-5 years in a Chapter 13 bankruptcy. It is an immediate benefit. What does it do, exactly? The Bankruptcy Automatic Stay, under Section 362 of the US Bankruptcy Code, forbids creditors from committing any act that constitutes an attempt to collect on a debt. This includes phone-calls, letters, foreclosures, repossessions and seizures of property, set-offs of funds, perfection of liens, garnishments, civil collection lawsuits, etc. Some creditors are not barred by the Automatic Stay, such as those collecting for past-due child-support and for criminal penalties, and it may only very temporarily stop an eviction if the landlord has already obtained a judgment for occupancy of the premises prior to a tenant's bankruptcy filing. Otherwise, every creditor that you owe money to is barred from trying to collect it while the Automatic Stay is in place. An attempt to collect a debt by a creditor after you have filed a bankruptcy, in other words, which perhaps is perfectly legal otherwise (although not always!), becomes a violation of Federal law after you have filed a Chapter 7 or Chapter 13 bankruptcy. And, as everyone knows, there are serious consequences to violating Federal law. Thus, most creditors do comply with the Bankruptcy Automatic Stay, and the immediate result, therefore, of a Chapter 7 or Chapter 13 bankruptcy filing is that, if you been experiencing heavy creditor harassment, it will generally very quickly stop. You may, for the first time in weeks or months, be able to sit down and enjoy a family dinner without the phone ringing.
The Bankruptcy Automatic Stay: Who Does It Protect in Chapter 7 & For How Long?
In a Chapter 7, the Bankruptcy Automatic Stay protects the individual filing the bankruptcy. If the Chapter 7 is jointly filed between marital partners, the Bankruptcy Automatic Stay will protect both. The Bankruptcy Automatic stay will not protect, however, non-filing co-debtors or co-signors of jointly held debt. So, if your mother co-signed a loan for you, your Chapter 7 bankruptcy filing will stop your creditor from harassing you for collection—but not your mother. It is important to remember that, with regard to joint debt, all parties liable for the debt are liable "jointly and severally" for the debt typically in Michigan and in most states. This means that you are each liable for 100% of the full debt, not 50% of the total debt balance each. Thus, if you stay and eventually discharge your liability in your Chapter 7, you will leave your co-debtors liable for 100% of the remaining balance. The Bankruptcy Automatic Stay is a temporary injunction which will persist only for the duration of the Chapter 7 bankruptcy case through discharge, which is, usually, as noted above, a roughly 4 month period. It lasts until the discharge is granted, although a Chapter 7 case can remain open for a considerable length of time beyond the 4-month point at which a discharge of debt is granted if the Chapter 7 Trustee is in the process of liquidating some of your assets or if there is litigation with the Trustee or a creditor ongoing. In any case, at the point that the discharge is granted, the Bankruptcy Automatic Stay expires, and a different, permanent injunction takes over: the Discharge Injunction. The bankruptcy discharge is itself a sort of injunction which prohibits your creditors from EVER collecting on the discharged debt or debts ever again, as well as requiring specific performances regarding credit reporting and other items. Once the Discharge Injunction is in place, there is no further need for the Bankruptcy Automatic Stay.
The Bankruptcy Automatic Stay: Who Does It Protect in Chapter 13 & How Long Does It Last?
In a Chapter 13, the Bankruptcy Automatic Stay protects not only the individual (or jointly filing individuals) but also individual (i.e., human, not corporate or some other form of legal entity) co-debtors—if the debt jointly held is a consumer and not a "non-consumer" debt (i.e., not a business debt or tax debt, etc.). In other words, if your mother co-signed for a credit card for you, your mother will be protected from creditor harassment for the duration of your Chapter 13 bankruptcy. If you and your mother, however, started a business together and racked up a business debt that you each personally guaranteed as co-signors, your mother (and, potentially, the business if it is an LLC or other legal corporate entity) will NOT be protected by the Chapter 13 Bankruptcy Automatic Stay. The Chapter 13 Bankruptcy Automatic Stay, in short, allows for a "co-debtor automatic stay" for co-debtors that are people for regular, ordinary, consumer debts. This is a feature that the Chapter 7 version does not possess. Why are co-debtors protected so protected in a Chapter 13 bankruptcy? It is because of the nature of the Chapter 13. While a Chapter 7 is a "liquidation" or "straight" bankruptcy, allowing total, 100% discharge of all debts that you have that have not been classified as "non-dischargeable" by the US Bankruptcy Code (recent tax debts, child support arrearages, etc.), a Chapter 13 is a "reorganization" or "payment plan" bankruptcy. In a Chapter 7, you walk away from all of your debts (that are dischargeable) in a short period of time. Creditors, thus, have the right under Michigan state and Federal law by way of the contracts you and your co-debtors signed to assume the debt to pursue anyone else who may be liable, or else they would receive nothing at all. They simply cannot pursue you. In a Chapter 13 bankruptcy, you essentially, over 3-5 years, repay some of what you owe to your creditors through a Federal court-enforced payment plan. Depending upon your income relative to your normal and necessary household expenses, you might repay through your Chapter 13 payment plan anywhere from 0%-100% of what you owe to your creditors. Whatever you don't repay through your Chapter 13, at the end of the payment plan, is then discharged totally as it would have been in a Chapter 7. Thus, the Bankruptcy Automatic Stay in Chapter 13 protects your co-debtors because they will only be liable for the remaining balance that is discharged as to you at the end of your Chapter 13. So, if you repaid 75% of a credit card that your mother co-signed for you, she would only be liable for the remaining 25%. Since a Chapter 13 bankruptcy lasts for 3-5 years and the remaining liability is not fully determined until the bankruptcy discharge is granted at the end of that 3-5-year period, your individual co-debtors are protected by the Chapter 13 c0-debtor stay for the entire 3-5 year period. Protection for co-debtors is one of many reasons to consider a Chapter 13 bankruptcy under some circumstances rather than a Chapter 7 bankruptcy, even if you are eligible for a Chapter 7 under the Chapter 7 bankruptcy means test.
The Bankruptcy Automatic Stay: Can Creditors Have It Lifted?
Some types of creditors may have the Bankruptcy Automatic Stay lifted in some cases, allowing them to proceed with some sorts of collections actions even during the pendency of your Chapter 7 or Chapter 13 bankruptcy case. Primarily, "secured" creditors are liable to do this sort of thing. A "secured" creditor is a creditor holding a debt that is secured by collateral of some sort. For instance, a home mortgage loan is secured, generally, by the collateral of the house that is being purchased itself. Likewise, an automobile loan is secured by the collateral of the automobile being purchased. There are many other sorts of secured creditors, but these are the most common. Secured creditors have rights under the Bankruptcy Code to ensure that their collateral is "adequately protected." That bit of Bankruptcy Code jargon basically means that they have a legal and contractual right to ensure that the value of their collateral is not denigrated in any way by your bankruptcy process. If a home that serves as collateral for a secured mortgage loan is uninsured, or if mortgage installment payments are past-due at the time of filing of a bankruptcy, the mortgage creditor may file a motion with the US Bankruptcy Court in which your petition has been filed to seek to have the Bankruptcy Automatic Stay lifted so that they may proceed, typically, with a foreclosure action, which, in Michigan and elsewhere, is the means by which a secured mortgage creditor reclaims title to the real property collateral securing your mortgage note loan. Such motions are filed routinely when payments are late or behind schedule. It doesn't always mean that a foreclosure is imminent as, often, here in the Eastern District of Michigan, the foreclosure attorneys retained by the mortgage creditors have a sort of standard operating procedure which requires them to work to have the Bankruptcy Automatic Stay lifted. One would expect that a foreclosure would shortly follow, but, especially in the City of Detroit, it simply often doesn't. (When push comes to shove, mortgagee creditors would rather have YOU be responsible for maintenance and insurance until they are good and ready to take the title to the home back through a foreclosure and re-market it.) Motions to lift the automatic stay, like any other motion filed in Bankruptcy Court, may be opposed by you. Whether to bother responding to a motion to lift the automatic stay will depend greatly upon the content of the motion filed, the supporting documentation attached in exhibit to the motion, and, most importantly, whether you are surrendering the home in your bankruptcy or retaining it. Your Michigan bankruptcy attorney should examine all such motions extremely carefully for any indication of impropriety, even where you are surrendering the home and are actually hoping that goes through foreclosure sooner than later in order to get it off of your hands. The bankruptcy attorneys of The Hilla Law Firm, PLLC carefully scrutinize every document filed in all of our clients' Chapter 7 and Chapter 13 bankruptcy cases and never assume that any motion filed is simply "routine."
The Bankruptcy Automatic Stay: What Happens When Creditors Violate It?
When creditors violate the Bankruptcy Automatic Stay, the Bankruptcy Code says that damages and costs and other sanctions may be awarded. Creditors can violate the Bankruptcy Automatic Stay even through simple inaction. For example, in a Chapter 7 case recently handled by Attorney John Hilla, a creditor who had sued one of our clients for collections prior to filing did all of the right things to stop the lawsuit upon notification of the Chapter 7 filing—but neglected to stop a process server who had been previously contracted to serve process on our client. The process server showed up at our clients' home on a Sunday near to the Easter holiday during their young child's birthday party, with our client's entire extended family present, none of whom knew that our clients had filed for bankruptcy. The judge awarded our clients several thousand dollars in that case (far more than they paid in attorney fees for the Chapter 7) for the creditor's violation of the Bankruptcy Automatic Stay through simple failure to stop the motion of one component of their collection process. The example serves also to answer the "What Happens When—?" question: we sue them. Case-law and the point-of-view of most Bankruptcy Court judges requires that warning letters requesting the cessation of collections activity and other "warning shots" before a motion for sanctions other remedy will be granted. But the remedies are there, and attorney John Hilla and The Hilla Law Firm, PLLC will make full use of the available legal remedies if your creditors fail to abide by the Bankruptcy Automatic Stay. When interviewing a prospective bankruptcy attorney to determine if they are the right bankruptcy lawyer for you, an important question to ask them is what they will do if creditors don't stop bothering you after you file. Many Detroit-area and Michigan bankruptcy firms operate with a "factory mentality," filing as many cases as possible with as little attorney staffing as possible to maximize profits. Customer service and client attention post-filing often lacks in such firms. Be sure to hire an attorney who will aggressively represent you even after you've paid your fee. If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.