When an individual or business files for bankruptcy, the “automatic stay” goes into effect. The automatic stay prohibits creditors from initiating or continuing debt collection actions against a debtor such as wage garnishment, sheriff’s sales, tax liens, eviction, utility disconnections, and foreclosure. The creditor may not contact the debtor in any manner about the debt. Any property seized by creditors just before the bankruptcy filing must be returned to the debtor. This gives the debtor “breathing room” while the bankruptcy case is being processed.
When is the Automatic Stay Inapplicable?
Domestic Support Orders
The automatic stay does not apply to those debts arising from alimony, separate maintenance, or child support payments. A suit to determine paternity or seeking child support may continue during the bankruptcy case. A spouse seeking alimony may also bring suit against the debtor.
While the I.R.S. cannot seize property or income to collect on past taxes or actively seek payment of back taxes, it is allowed to audit a debtor, issue tax deficiency notices, and demand payment on assessments.
Criminal Prosecution or Motor Vehicle Violations
A debtor may be prosecuted for criminal acts and motor vehicle violations despite the automatic stay. The automatic stay does apply, however, to any financial components of the prosecution, such as the payment of a fine.
Relief from the Automatic Stay
In certain circumstances, a creditor may petition the court to lift the automatic stay, or in other words, to set aside the stay as it applies to that creditor. Typically, a creditor seeks such relief when the debtor will be unable to make payments on the asset and the asset is depreciating during the bankruptcy case, such as in the case of a house mortgage.
Chapter 11 Bankruptcy
In Chapter 11 cases, creditors often seek relief from the automatic stay because there is a long period of time that elapses between the filing of the petition and the time the debtor begin repayment. The court may require the debtor to continue payments on the property, however, to reduce depreciation or the eroding of the equity in the property.
Chapter 13 Bankruptcy
Because a debtor in Chapter 13 bankruptcy may begin repayment within six months of filing, creditors are less likely to seek relief from the automatic stay than in a Chapter 11 bankruptcy. Bringing a motion for relief may cost more than it is worth. A creditor may do so, however, if the repayment plan is unlikely to be confirmed and the debtor will be unable to keep current with payments.
The automatic stay is one of the main protections of bankruptcy. During the case, it allows the debtor to organize his financial matters without the pressure of debt collection efforts. The automatic stay is inapplicable to some debts such as domestic support payments. In some instances the court may lift the automatic stay when secured property will depreciate significantly and the debtor will be unable to comply with repayment obligations.