In Bankruptcy Information, consumer law

One of the most powerful tools in the bankruptcy tool box is the automatic stay. Lawyers talk about it a lot, creditors are afraid of violating it and most debtors wonder what it is.

The word “stay” means to remain in one place. Well-trained dogs stay, meaning they don’t move. If you stay at home, you don’t leave home. In bankruptcy, “stay” means roughly the same thing. Everything related to the debtor, his assets and his debts remains frozen in place as of the day he files his bankruptcy petition. This stay, or freezing of things, is automatic upon filing. No court order is required.

There are several purposes for the automatic stay. One is to protect the debtor and give him some relief from the constant harassment that often accompanies debt collection. Once the stay goes into effect, all lawsuits have to stop; all collection attempts, including demand letters and telephone calls, must cease. Foreclosures or repossessions of property are halted. Garnishments stop.

Another purpose is to protect creditors. Prior to bankruptcy, collection of debts is usually a first come-first served matter. The first creditor to garnish wages gets the available money from the debtor, leaving later creditors out in the cold. A creditor who seizes assets such as a car or bank account has first dibs on the value (subject to any perfected security interest). Because the automatic stay halts all that, no one creditor can gain an advantage over any other creditor by moving quickly. This freeze lets the bankruptcy trustee examine the debtor’s assets and determine how much might be available for a pro-rata distribution to creditors. “Pro-rata” means everyone gets a share of what is available based on the size of the creditor’s claim. For example, suppose the debtor owes $10,000 and has $1,000 in assets. Each creditor will get 10% of what is owed to it because $1,000 is 1/10 of $10,000. If creditor A is owed $3,000, she will receive $300. If creditor B is owed $5,000, he will get $500.

In the past, some unscrupulous debtors filed bankruptcies one after the other, never intending to get a discharge, but only using the automatic stay to prevent foreclosure or repossession of a car. Often they filed Chapter 13, which would stop foreclosure or repossession for a few months until their case got dismissed, usually because they didn’t make the plan payments. Then, as another foreclosure or repossession date approached, they would file again. In 2005, when the Bankruptcy Code was changed, it made this kind of repeat filing impossible.

If you are facing a financial crisis, please contact us.

 

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